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Answer: a translation loss on the income statement.
## Explanation Under the temporal method: - **Monetary assets and liabilities** are translated at the current exchange rate - **Non-monetary assets and liabilities** are translated at historical exchange rates **Analysis of the balance sheet items:** - **Monetary assets**: Cash (400,000) + Accounts receivable (280,000) = 680,000 EUR - **Monetary liabilities**: Accounts payable (200,000) + Long-term debt (1,400,000) = 1,600,000 EUR - **Net monetary liability position**: 1,600,000 - 680,000 = 920,000 EUR **Impact of EUR strengthening against USD:** - When the functional currency (EUR) strengthens against the reporting currency (USD), monetary liabilities create translation losses - The net monetary liability position of 920,000 EUR means the company has more monetary liabilities than monetary assets - As EUR strengthens, the USD value of these liabilities increases, creating a translation loss Therefore, the company recognizes a **translation loss on the income statement**.
Author: LeetQuiz Editorial Team
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An analyst gathers the following information (in EUR) about a subsidiary's balance sheet at fiscal year-end:
During the fiscal year, EUR strengthens against USD. Using the temporal method when translating the subsidiary's financial statements into USD, the company recognizes:
A
a translation loss on the income statement.
B
a translation gain on the income statement.
C
a positive translation adjustment to shareholders' equity.
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