On January 1, Narnevik Corporation formed a subsidiary in a foreign country. On April 1, the subsidiary purchased inventory on account at a cost of 250,000 local currency units (LCU). One-fifth of this inventory remained unsold on December 31, while 30 percent of the account payable had not yet been paid. The U. S. $ per LCU exchange rates were as follows:

January 1 ... $0.60

April 1 ... 0.58

Average for the current year ... 0.56

December 31 ... 0.54

At what amounts should the December 31 balances in inventory and accounts payable be translated into U. S. dollars using the current rate method?

The amount of inventory balance on December 31 in US dollars is US$27,000.

The amount of accounts payable balance on December 31 in US dollars is US$32,400.

Explanation:

The current rate method is a technique used in translating foreign currency by using the current exchange to translate the majority of items in the financial statements.

Since the amounts of inventory and accounts payable to be translated is for December 31, the current rate to be used is US$0.54.

From the question, we need to calculate the amounts of inventory and accounts payable in LCU before we can translate as follows:

1. Calculation of the amount of inventory at December 31

Inventory Purchased on April 1 = 250,000 LCU

One-fifth of the inventory unsold on December 31 = (1 : 5) * 250,000 LCU

= 0.2 * LCU 250,000

= 50,000 LCU

Inventory unsold on December 31 is therefore 50,000 LCU.

This can therefore be converted to US $ using current rate of US$0.54 as follows:

Inventory unsold on December 31 = 50,000 LCU * US$0.54

= US$27,000

2. Calculation of the amount of unpaid accounts payable at December 31

Inventory sold is equal to Inventory Purchased on April 1 minus the one-fifth of the inventory unsold on December 31. This calculated as follows:

Inventory sold = 250,000 LCU - 50,000 LCU

= 200,000 LCU

The amount of unpaid accounts payable at December 31 is equal to the amounts of inventory sold multiply by 30 percent used to represent the account payable not yet paid. We therefore have:

Unpaid accounts payable at December 31 = 200,000 LCU * 30%

= 60,000 LCU

This can also be converted to US $ using current rate of US$0.54 as follows:

Unpaid accounts payable at December 31 = 60,000 LCU * US$0.54

= US$32,400.

Therefore, the amount of inventory balance on December 31 in US dollars is US$27,000, while the amount of accounts payable balance on December 31 in US dollars is US$32,400.