Choice "D" is correct. The foreign subsidiary's functional currency is the currency of the environment in which the subsidiary primarily generates and expends cash.Rule: The functional currency of a company may be:

1. A foreign entity's local currency, which is typically the one in which the entity keeps its books;

2. The currency in which the financial statements will be presented, which is the currency of the parent company; or

3. A foreign currency other than the one in which the foreign entity maintains its books.

Rule: The functional currency of an entity generally depends upon the environment in which the entity generates and expends cash (unless there is a requirement by law to use another currency), which may be any of the above three. However, the functional currency cannot be the local currency if the foreign entity operates in a highly inflationary environment (i.e., approximately 100% over three years). Choices "c", "a", and "b" are incorrect, any of which could be considered a functional currency, given the proper circumstances. The definition of a functional currency is given in the correct selection, "D".