Bentley Biscuits, a wholly-owned English subsidiary of U.S. Bakery (a U.S. firm) maintains its inventory at cost, and Bentley Biscuits’ books are reflected in British pound sterling. U.S. Bakery's functional currency is U.S. dollars. Determine the inventory value using both the temporal and current methods. Show how this will be reflected on Bentley Biscuits' statements and the consolidated statement of U.S. Bakery. Use the following information for this calculation: The historical cost of inventory is £500,000. The historical exchange rate is $0.550. The current exchange rate is $0.579.

Question

Bentley Biscuits, a wholly-owned English subsidiary of U.S. Bakery (a U.S. firm) maintains its inventory at cost, and Bentley Biscuits’ books are reflected in British pound sterling. U.S. Bakery's functional currency is U.S. dollars. Determine the inventory value using both the temporal and current methods. Show how this will be reflected on Bentley Biscuits' statements and the consolidated statement of U.S. Bakery. Use the following information for this calculation: The historical cost of inventory is £500,000. The historical exchange rate is $0.550. The current exchange rate is $0.579.

Answer 1

To determine the inventory value using both the temporal and current methods, we need to understand the difference between these two methods.

The temporal method is based on historical exchange rates, while the current method uses the current exchange rates to convert the inventory value.

Using the temporal method:
1. Calculate the historical cost of inventory in U.S. dollars by multiplying the historical cost (£500,000) by the historical exchange rate ($0.550):
Historical cost in USD = £500,000 * $0.550 = $275,000

2. Reflect this value on Bentley Biscuits' books by recording the inventory at the historical cost of $275,000 in their British pound sterling financial statements.

3. On the consolidated statement of U.S. Bakery, the inventory value will also be reported at the historical cost of $275,000.

Using the current method:
1. Calculate the current cost of inventory in U.S. dollars by multiplying the historical cost (£500,000) by the current exchange rate ($0.579):
Current cost in USD = £500,000 * $0.579 = $289,500

2. Reflect this value on Bentley Biscuits' books by recording the inventory at the current cost of $289,500 in their British pound sterling financial statements.

3. On the consolidated statement of U.S. Bakery, the inventory value will be reported at the current cost of $289,500.

In summary, using the temporal method, Bentley Biscuits and U.S. Bakery would show the inventory value at the historical exchange rate of $0.550, which is $275,000. Using the current method, the inventory value would be at the current exchange rate of $0.579, resulting in $289,500.