12. Hanover Inc. spent £11.5 million building a factory in England in 1996 when the British Pound cost $1.5500. The plant operation was set up as a British subsidiary to manufacture Hanover’s product for sale and distribution in the United Kingdom and Europe. Hanover closed its consolidated books for the 2005 fiscal year on July 24, 2006. (Many companies keep their books on fiscal years that don’t coincide with calendar years.) Hanover is subject to a 40% tax rate in the United States and a 45% rate in the United Kingdom.

a. How much did Hanover make or lose on the value of its English factory due to exchange rate movements in the ten years since it was built? Use the exchange rates in Table 18.1.

b. Explain the tax impact of the gain or loss?

c. Where does the gain or loss show up in Hanover’s financial statements? Where doesn’t it show up in 2006 or in previous years?