A U.S. company owns an 80% interest in a company located on Mars. Martian currency is called the Martian Credit. During the year the parent company sold inventory that had cost $24,000 to the subsidiary on account for $30,000 when the exchange rate was $.5192. The subsidiary still held one-half of the inventory and had not paid the parent company for the purchase at the end of the fiscal period. The unsettled account is denominated in dollars. The exchange rate at the fiscal year-end was $.4994.

Required:

A.

(1) Compute the amounts that would be reported for the inventory and accounts payable in the subsidiary’s translated balance sheet. The entity’s functional currency is the Martian Credit.

(2) Compute the subsidiary’s transaction gain or loss on the accounts payable denominated in dollars.

(3) How is the transaction gain or loss reported in the foreign entity’s financial statements?

B. Compute the amount of the intercompany profit to be eliminated in the consolidated statements workpaper prepared for the current year.

C.

(1) Assuming that the transaction had been denominated in 50,204 Martian Credits rather than dollars, compute the transaction gain or loss that would be reported by the parent company.

(2) How is the gain or loss reported in the consolidated financial statements?

(3) How would your answer differ if the loan to the foreign subsidiary was considered to be of a long-term investment nature?