Walla Corporations International Division consists of two of Wallas subsidiaries. One of the

subsidiaries operates in the United Kingdom and the other on the European continent. The U.K.

subsidiary had identical sales revenue amounts, as measured in British pounds, in 20X1 and 20X2

and reported a 25% gross profit margin in both years. Similarly, the European subsidiarys sales

revenue was the same in 20X1 and 20X2 when measured in euros. It reported a 33.33% gross profit

margin in both years. Both subsidiaries account for their inventories under FIFO.

Assume the British pound was rising steadily in value versus the U.S. dollar throughout 20X1 and

20X2. Assume the euro was declining steadily in value versus the U.S. dollar throughout 20X1 and

20X2.

Required:

1, If Walla uses the current rate method to translate the British subsidiarys financial statements into

U.S. dollars, how is the British subsidiarys 20X2 gross margin percentage, based on its U.S. dollar

financial statements, most likely to compare to its gross margin percentage based on the 20X2

British pound financial statements? Explain. (3 Marks)

2, If Walla uses the temporal method to translate the British subsidiarys financial statements into

U.S. dollars, how is the British subsidiarys 20X2 gross margin percentage, based on its U.S. dollar

financial statements, most likely to compare to its gross margin percentage based on the 20X2

British pound financial statements? Explain. (3 Marks)

3, If Walla uses the current rate method to translate both subsidiaries financial statements into U.S.

dollars, how is the gross margin percentage for the International Division in 20X2 most likely to

compare to the gross margin percentage of the International Division in 20X1? Explain. (3 Marks)