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Dollar equivalent of the inventory balance by first restating for foreign inflation, then translating to U.S. dollars.

Aztec Corporation, a U.S. subsidiary in Mexico City begins and ends its calendar year with an inventory balance of P500 million. The dollar/peso exchange rate on January 1 was $.02=P1. During the year, the U.S. general price level advances from 180 to 198 while Mexican general price level doubles. The exchange rate on December 31 was $0.015=P1.

a. Using the temporal method of translation, calculate the dollar equivalent of the inventory balance by first restating for foreign inflation, then translating to U.S. dollars.

b. Repeat part (a), but translate the nominal peso balances to dollars before restating for U.S. inflation.

c. Which dollar figure do you think provides the more useful information?

d. If you are dissatisfied with either result, suggest a method that would prove more useful information that those is parts (a) and (b).

Solution Preview

a. Using the temporal method of translation, calculate the dollar equivalent of the inventory balance by first restating for foreign inflation, then translating to U.S. dollars.

Under the temporal rate method, the objective is to measure each subsidiary transaction as though the transaction had been made by the parent.
Exchange
Date Inventory Rate Dollars
Balance, ...

Solution Summary

This solution is comprised of a detailed explanation to answer the request of the assignment of more than 200 words of text.

$2.19