Following are descriptions of several independent situations. 1. Rockford Company has a subsidiary in Argentina. The subsidiary
Question:
Following are descriptions of several independent situations.
1. Rockford Company has a subsidiary in Argentina. The subsidiary does not have much debt, because of the high interest costs resulting from the average annual inflation rate exceeding 100 percent. Most of its sales and expense transactions are denominated in Argentinian pesos, and the subsidiary attempts to minimize its receivables and payables. Although the subsidiary owns a warehouse, the primary asset is inventory that it receives from the Rockford Company. The Argentinian government requires all companies located in Argentina to provide the central government with a financial report using the Argentinian system of accounts and governmentmandated forms for financial statements.
2. JRB International is located in Dallas, Texas, and is the world's largest manufacturer of electronic stirrups. The company acquires the raw materials for its products from around the world and begins the assembly process in Dallas. It then sends the partially completed units to its subsidiary in Mexico for completion of the assembly. Mexico has been able to hold its inflation rate under 100 percent over the last three years. The subsidiary is required to pay its employees and local vendors in Mexican pesos. The parent company provides all financing for the Mexican subsidiary, and the subsidiary sends all its production back to the warehouse in Dallas, from which it is shipped as orders are received. The subsidiary provides the Mexican government with financial statements.
3. Huskie Inc. maintains a branch office in Great Britain. The branch office is fairly autonomous because it must find its own financing, sets its own local marketing policies, and is responsible for controlling its own costs. The branch receives weekly shipments from Huskie Inc., which it then conveys to its customers. The pound sterling is used to pay the subsidiary's employees and to pay for the weekly shipments.
4. The Hola Company has a foreign subsidiary located in a rural area of Italy, right next to the French-Italian border. The subsidiary hires virtually all its employees from France and makes most of its sales to companies in France. The majority of its cash transactions are maintained in the French franc. However, it is required to pay local property taxes and sales taxes in Italian lira and to provide annual financial statements to the Italian government.
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For each of these independent cases, determine:
a. The foreign entity's reporting currency in which its books and records are maintained.
b. The foreign entity's functional currency.
c. The process to be used to restate the foreign entity's financial statements into the reporting currency of the United States-based parent company.
Step by Step Answer:
Advanced Financial Accounting
ISBN: 9780072444124
5th Edition
Authors: Richard E. Baker, Valdean C. Lembke, Thomas E. King