If the dollar is the functional currency, where does Bell U.K.’s translation gain or loss show up on Bell U.S.’s financial statements?
1. Suppose that at the start and at the end of the year, Bell U.K., the British subsidiary of Bell U.S., has current assets of £1 million, fixed assets of £2 million, and current liabilities of £1 million. Bell has no long-term liabilities.
a. What is Bell U.K.’s translation exposure under the current/noncurrent, monetary/nonmonetary, temporal, and current rate methods?
b. Assuming the pound is the functional currency, if the pound depreciates during the year from $1.50 to $1.30, what will be the FASB-52 translation gain (loss) to be included in the equity account of Bell’s U.S. parent?
c. Redo Part b assuming the dollar is the functional currency. Included in current assets is inventory of £0.5 million. The historical exchange rates for inventory and fixed assets are $1.45 and $1.65, respectively. If the dollar is the functional currency, where does Bell U.K.’s translation gain or loss show up on Bell U.S.’s financial statements?