On January 1, the wholly-owned Mexican affiliate of a Canadian parent company ac
ID: 2557097 • Letter: O
Question
On January 1, the wholly-owned Mexican affiliate of a Canadian parent company acquired an inventory of computer hard drives for its assembly operation. The cost incurred was 15,000,000 pesos when the exchange rate was MXN11.3 = C$1. By year- end, the Mexican affiliate had used three- fourths of the acquired hard drives. Due to advances in hardware technology, the remaining inventory was marked down to its net realizable value of MXN1,750,000. The year-end exchange rate was MXN12.3 = C$1. The aver- age rate during the year was MXN11.8 = C$1. ?Required:
Would your answer change if the functional currency were the Canadian dollar? Please explain.
Explanation / Answer
As it is a inventory it should be valued on every closing date of balnce sheet and here it comes the situatio of obsolescense , then should be valued as on the date, here closing rate.if we caluclate in canadian dollars, then
value of inventory at beginning=15000000/11.3=1327434
1/4 of 1327434= 331858, which is lower than MXN pesos,
Therefore it comes the difference only the exchange difference but not methodology.