Question 6 (11 marks)

(a) Following are descriptions of several independent situations. ( 1.5*4=6 marks) 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 Argentinean 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 Rockford. The Argentinean government requires all companies located in Argentina to provide the central government with a financial report using the Argentinean system of accounts and government-mandated forms for financial statements.

2. JRB International, located in Dallas, Texas, is the worlds 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 assembly completion. 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 of 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, set its own local marketing policies, and control 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 subsidiarys employees and to pay for the weekly shipments.

4. Hola Company has a foreign subsidiary located in a rural area of Switzerland, right next to the SwissFrench 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 European euro. However, it is required to pay local property taxes and sales taxes in Swiss francs and to provide annual financial statements to the Swiss government.

Required For each of these independent cases, determine

I. The foreign entitys recording currency in which its books and records are maintained.

II. The foreign entitys functional currency.

III. The process to be used to restate the foreign entitys financial statements into the reporting currency of the U.S.-based parent company.

(b) Wahl Companys 20X5 consolidated financial statements include two wholly owned subsidiaries, Wahl Company of Australia (Wahl A) and Wahl Company of France (Wahl F). Functional currencies are the U.S. dollar for Wahl A and the European euro for Wahl F. (5 marks)

Required

I. What are the objectives of translating a foreign subsidiarys financial statements? (1 mark)

II. How are gains and losses arising from the translation or remeasurement of each subsidiarys financial statements measured and reported in Wahls consolidated financial statements? (2 marks)

III. What exchange rate is used to incorporate each subsidiarys equipment cost, accumulated depreciation, and depreciation expense in Wahls consolidated financial statements? (2 marks)