FINANCIAL ACCOUNTING (LOOSELEAF)
FINANCIAL ACCOUNTING (LOOSELEAF)
18th Edition
ISBN: 9781260706239
Author: williams
Publisher: MCG
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Question
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Chapter 15, Problem 3AP

a.

To determine

Calculate the amount of bonus based on;

(1) Company G peso-based pre-tax income.

(2) Company G dollar-based pre-tax income.   Translate the peso-based bonus of Company G into dollars using current exchange rate.

a.

Expert Solution
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Explanation of Solution

(1) The calculation based on Company G pesos pre-tax income is as follows:

AmountofbonusbasedonPesospre-taxincomeof Company G)=(Company Gpesospretaxincome×Predeterminedbonus percentageofpretaxannualincome)=MXN4,000,000×15%=MXN600,000

Therefore, the peso-based bonus for Company G is MXN 600,000.

(2) The calculation based on Company G dollar-based pre-tax income is as follows:

Amountofbonusbasedondollars pre-taxincomeof comapny G)=(Pre-taxincome of Comapny G in dollars×Predeterminedpercentageofpre-taxannualincome)=($600,000)×15%=($90,000)ornobonus

Therefore, the dollar-based bonus for Company G is ($90,000) or no bonus.

Convert the Company G pesos pre-tax income in to Company G dollars using current exchange rate:

ConversionofCompanyGpesospre-taxinomeintodollars)=CurrentExchangerateindollarsCompany Gpesospre-taxincome=0.0570indollarsMXN600,000=$34,002bonus

Note: The value of current exchange rate is taken from Exhibit 15-7.

b.

To determine

Calculate the average exchange rate that is used to translate the Company G’s pesos income statement into the Company G’s dollar statement for the categories:

  1. (1) Sales and
  2. (2) Expenses.

b.

Expert Solution
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Explanation of Solution

The average exchange rate that is used to translate the Company G pesos income statement into the Company G dollar statement for sales is calculated as follows:

Averageexchangerate=SalesofCompanyG indollarsSalesofCompanyinMXN=$6,000MXN80,000=$.075/pesos

Therefore, the average exchange rate is $0.075/ pesos.

The average exchange rate that is used to translate the Company G pesos income statement into the Company G dollar statement for expenses is calculated as follows

Averageexchangerate=ExpensesofCompanyGindollarsExpensesofCompany G in MXN=$6,600MXN76,000=$.08684/pesos

Therefore, the average exchange rate is $0.08684/ pesos.

Note: MXN is the currency unit of Mexico.

c.

To determine

Explain the way in which global products of Country M’s pre-tax income became a dollar pre-tax loss.

c.

Expert Solution
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Explanation of Solution

The way in which global products of Country M’s pre-tax income became a dollar pre-tax loss is listed as follows:

  • The difference in the average exchange rates is caused by translation timing differences.
  • For example, Sales may clutch around holidays, but expenses for cost of sales remains continuous over the year.
  • The procedures to create the translated statement by Incorporation G might cause the disparities in the average exchange rate.

d.

To determine

Explain a reason for which the dollar-based pre-tax income would be appropriate for evaluating Person S and a reason for which the peso-based pre-tax income would be appropriate for evaluating Person S and state the option that is appropriate.

d.

Expert Solution
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Explanation of Solution

There is no clear answer to this question but certain issues that can be discussed are as follows:

  • Does Person S have the ability to “control” USD income?
  • If the objective is to generate profits that can be distributed to Company G stockholders, the dollar based pre-tax income may be appropriate.
  • What is the Incorporation G’s subsidiary objective?
  • If it is market penetration, then sales may be a better basis for performance evaluation.
  • Do the translation procedures that result in a USD pre-tax loss make economic sense?

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