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On August 1 , 2 0 1 3 , William signed a noncancelable order to purchase a machine from a company located in Japan. The
On August William signed a noncancelable order to purchase a machine from a company located in Japan. The contracted price was yen, payable on January The machine will be delivered to William on November In order to hedge against a strengthening of the yen, William entered into a forward exchange contract on August to purchase yen on January On November the transaction date, the US company received the machine from the Japanese company. Spot and forward exchange rates on various dates follow: Spot Rate $ yen Forward Exchange Rate $ yen August $ $ November $ $ December $ $ January $ As the international aspects of Williams business continue to expand, William purchases a controlling interest in Parisian Co a French company located in Paris. Parisian has the euro as its local currency. Your manager is vaguely aware that the designation of the functional currency for Parisian may have significant and potentially different consequences for the consolidated financial statements of the parent company and its foreign subsidiaries. Being mindful of the bottom line, your manager makes it clear to you that he or she would strongly prefer that you choose the functional currency that would be likely to have the most favorable or least negative potential impact on consolidated net income. Tasks: Draft a one to twopage memorandum in response to your managers concerns. Address the following specific points: In which currency will the yearend consolidated financial statements be prepared? Will the financial statements be translated or remeasured? How will you determine this? Explain the rationale for your answer. How would an asset such as Buildings be accounted for using each method translation vs remeasurement Provide succinct but complete communication and avoid the use of accounting jargon, given the nature of the audience.
On August William signed a noncancelable order to purchase a machine from a company located in Japan. The contracted price was yen, payable on January The machine will be delivered to William on November
In order to hedge against a strengthening of the yen, William entered into a forward exchange contract on August to purchase yen on January
On November the transaction date, the US company received the machine from the Japanese company. Spot and forward exchange rates on various dates follow:
Spot Rate
$ yen
Forward Exchange
Rate $ yen
August
$
$
November
$
$
December
$
$
January
$
As the international aspects of Williams business continue to expand, William purchases a controlling interest in Parisian Co a French company located in Paris. Parisian has the euro as its local currency.
Your manager is vaguely aware that the designation of the functional currency for Parisian may have significant and potentially different consequences for the consolidated financial statements of the parent company and its foreign subsidiaries. Being mindful of the bottom line, your manager makes it clear to you that he or she would strongly prefer that you choose the functional currency that would be likely to have the most favorable or least negative potential impact on consolidated net income.
Tasks:
Draft a one to twopage memorandum in response to your managers concerns. Address the following specific points:
In which currency will the yearend consolidated financial statements be prepared?
Will the financial statements be translated or remeasured? How will you determine this? Explain the rationale for your answer.
How would an asset such as Buildings be accounted for using each method translation vs remeasurement
Provide succinct but complete communication and avoid the use of accounting jargon, given the nature of the audience.
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