Sepracor, Inc., a U.S. drug company, reported the following information

International Reporting Case

Sepracor, Inc., a U.S. drug company, reported the following information. The company prepares its financial statements in accordance with U.S. GAAP.

2007 (,000)
Current Liabilities $ 554,114
Convertible Subordinated Debt 648,020
Total Liabilities 1,228,313
Stockholders’ Equity 176,413
Net Income 58,333

Analysts attempting to compare Sepracor to international drug companies may face a challenge due to differences in accounting for convertible debt under iGAAP. Under IAS 32, Financial Instruments, convertible bonds, at issuance, must be classified separately into their debt and equity components based on estimated fair value.

INSTRUCTIONS:

(a) Compute the following rations for Sepracor, Inc. (assume that year-end balances approximate annual averages.)

(1) Return on assets.
(2) Return on stockholders’ equity
(3) Debt to asset ratio

(b) Briefly discuss the operating performance and financial position of Sepracor. Industry averages for these ratios in 2007were: ROA 3.5%; return on equity 16%; and debt to assets 75%. Based on this analysis would you make an investment in the company's 5% convertible bonds? Explain.

(c) Assume you want to compare Sepracor to an international company, like Bayer (which prepares its financial statements in accordance with iGAAP). Assuming that the fair value of the equity components of Sepracor's convertible bonds is $150,000, how would you adjust the analysis above to make valid comparisons between Sepracor and Bayer.

Click here for the solution: Sepracor, Inc., a U.S. drug company, reported the following information

On January 1, 2008, a U.S. company purchased 100% of the outstanding stock of Ventana Grains, a company located in Latz City, New Zealand

Problem 13-1 Translation—Local Currency Is the Functional Currency

On January 1, 2008, a U.S. company purchased 100% of the outstanding stock of Ventana Grains, a company located in Latz City, New Zealand. Ventana Grains was organized on January 1, 1994. All the property, plant, and equipment held on January 1, 2008, was acquired when the company was organized. The business combination was accounted for as a purchase transaction. The 2008 financial statements for Ventana Grains, prepared in its local currency, the New Zealand dollar, are given here.

VENTANA GRAINS
Comparative Balance Sheets
January 1 and December 31, 2008
Jan. 1 Dec. 31
Cash and Receivables 500,000 880,000
Inventories 600,000 500,000
Land 400,000 400,000
Buildings (net) 650,000 605,000
Equipment (net) 465,000 470,000
Totals 2,615,000 2,855,000

Jan. 1 Dec. 31
Short-Term Accounts and Notes 295,000 210,000
Long-Term Notes (600,000 issued
September 1, 2000, 80,000 issued
July 1, 2008) 600,000 680,000
Common Stock 800,000 800,000
Additional Paid-in Capital 200,000 200,000
Retained Earnings 720,000 965,000
Total 2,615,000 2,855,000

VENTANA GRAINS
Consolidated Income and Retained Earnings Statement
for the Year Ended December 31, 2008
Revenues 3,225,000
Cost of Goods Sold:
Beginning Inventory 600,000
Purchases 2,100,000
Goods Available for Sale 2,700,000
Less: Ending Inventory 500,000
Cost of Goods Sold 2,200,000
Gross Profit on Sales 1,025,000
Depreciation Expense 140,000
Other Expenses 540,000 680,000
Net Income 345,000

Jan. 1 Retained Earnings 720,000
Total 1,065,000
Less: Dividends Paid 100,000
Dec. 31 Retained Earnings 965,000

The account balances are computed in conformity with U.S. generally accepted accounting standards.

Other information is as follows:
1. Direct exchange rates for the New Zealand dollar on various dates were:
Date Exchange Rate
January 1, 1994 $.8011
September 1, 2004 .5813
January 1, 2008 .7924
July 1, 2008 .7412
December 31, 2008 .7298
Average for 2008 .7480
Average for the last four months of 2008 .7476
2. Ventana Grains purchased additional equipment for 100,000 New Zealand dollars on July 1, 2008, by issuing a note for 80,000 New Zealand dollars and paying the balance in cash.
3. Sales were made and purchases and “Other Expenses” were incurred evenly throughout the year.
4. Depreciation for the period in New Zealand dollars was computed as follows:
Building 45,000
Equipment—Purchased before 1/1/2008 85,000
Equipment—Purchased July 1, 2008 10,000
5. The inventory is valued on a FIFO basis. The beginning inventory was acquired when the exchange rate was $.7480. The ending inventory was acquired during the last four months of 2008.
6. Dividends of 50,000 New Zealand dollars were paid on July 1 and December 31.

Required:
A. Translate the financial statements into dollars assuming that the local currency of the foreign subsidiary was identified as its functional currency.
B. Prepare a schedule to verify the translation adjustment determined in requirement A. Describe how the translation adjustment would be reported in the financial statements.

Click here for the solution: On January 1, 2008, a U.S. company purchased 100% of the outstanding stock of Ventana Grains, a company located in Latz City, New Zealand

Crystal Exporting Co. is a U.S. wholesaler engaged in foreign trade

Problem 12-2 Importing/Exporting Transactions with a Forward Contract Hedge

Crystal Exporting Co. is a U.S. wholesaler engaged in foreign trade. The following transactions are representative of its business dealings. The company uses a periodic inventory system and is on a calendar-year basis. All exchange rates are direct quotations.

Dec. 1 Crystal Exporting purchased merchandise from Chang’s Ltd., a Hong Kong manufacturer. The invoice was for 210,000 Hong Kong dollars, payable on April 1. On this same date, Crystal Exporting acquired a forward contract to buy 210,000 Hong Kong dollars on April 1 for $.1314.
Dec. 29 Crystal Exporting sold merchandise to Zintel Retailers for 120,000 Hong Kong dollars, receivable in 90 days. No hedging was involved.
April 1 Crystal Exporting received 120,000 Hong Kong dollars from Zintel Retailers.
1 Crystal Exporting submitted full payment of 210,000 Hong Kong dollars to Chang’s, Ltd., after obtaining the 210,000 Hong Kong dollars on its forward contract.

Spot rates and the forward rates for the Hong Kong dollar were as follows:
Forward Rate for
Spot Rate April 1 Delivery
Dec. 1 $.1265 $.1314
Dec. 29 .1240 .1305
Dec. 31 .1259 .1308
April 1 .1430

Required:
A. Prepare journal entries for the transactions including the necessary adjustments on December 31.
B. Explain the income statement treatment given to any transaction gains and losses recognized at December 31.

Click here for the solution: Crystal Exporting Co. is a U.S. wholesaler engaged in foreign trade

(WorldCom Fraud) The WorldCom bankruptcy is one of the largest in U.S. economic history

13-35 (WorldCom Fraud) The WorldCom bankruptcy is one of the largest in U.S. economic history. Much of the fraud was carried out by capitalizing operating expenses such as payments to other companies for line rental, as fixed assets. Adjusting journal entries were made at the company’s headquarters in Mississippi even though property accounting records were located in Dallas.

Required:
1. Would it be considered unusual to find debits to fixed assets coming from a journal entry source rather than a purchase journal? Explain.
2. Would it be considered unusual to find entries to accumulated depreciation and depreciation expense to come from a journal entry source rather than another source?
3. Assume you were auditing WorldCom and in your sample of debits to fixed assets, you find an entry for $500,000 with the following notation:

“Capitalization of line capacity per CFO, amounts were originally incorrectly recorded as an expense.”

Explain what you would do to complete the audit of this item. What evidence would you need to see to either corroborate or question the entry?


Click here for the solution: (WorldCom Fraud) The WorldCom bankruptcy is one of the largest in U.S. economic history

A U.S. manufacturer wants to conduct business through a foreign subsidiary organized in a low tax jurisdiction

A U.S. manufacturer wants to conduct business through a foreign subsidiary organized in a low tax jurisdiction. How might it do so without being currently taxed on the subsidiary’s foreign earnings?


Click here for the solution: A U.S. manufacturer wants to conduct business through a foreign subsidiary organized in a low tax jurisdiction

Dillon, a U.S. citizen, resides in Country K for all of 2010

C:16-44 Foreign-Earned Income Exclusion. Dillon, a U.S. citizen, resides in Country K for all of 2010. Dillon is married, files a joint return and claims two personal exemptions. The following items pertain to his 2010 activities:

Salary and allowances (other than for housing) a $175,000
Housing allowance 28,000
Employment-related expenses b 7,500
Housing costs 30,000
Other itemized deductions 4,000
Country K income taxes 12,000

a) All of Dillon’s salary and allowances are attributable to services performed in Country K.
b) Dillon claims the employment-related expenses as itemized deductions.
What is Dillon’s net U.S. tax liability for 2010 (assume that Dillon excludes his earned income and housing cost amount)?


Click here for the solution: Dillon, a U.S. citizen, resides in Country K for all of 2010

Tucson, a U.S. corporation organized in Year 1, reports the following items for a three-year period

C:16-41 Foreign Tax Credit Limitation. Tucson, a U.S. corporation organized in Year 1, reports the following items for a three-year period.

Foreign tax accrual $ 100,000 $ 120,000 $ 180,000
Foreign source taxable income 400,000 300,000 500,000
Worldwide taxable income 1,000,000 1,000,000 1,000,000
The foreign source and worldwide taxable income items are determined under U.S. law.

a. What is Tucson’s foreign tax credit limitation for each of the three years (assume a 34% U.S. corporate tax rate and that income from all foreign activities fall into a single basket)?
b. How are Tucson’s excess foreign tax credits (if any) treated? Do any carryovers remain after Year 3?
c. How would your answers to Parts a and b change if the IRS determines that $100,000 of expenses allocable to U.S.-source income should have been allocable to foreign source income?
d. What measures should Tucson consider if it expects its current excess foreign tax credit position to persist in the long-run?


Click here for the solution: Tucson, a U.S. corporation organized in Year 1, reports the following items for a three-year period

Arnie, a U.S. citizen who uses the calendar year as his tax year and the cash method of accounting, operates a sole proprietorship in Country Z

C:16-39 Translation of Foreign Tax Payments.

Arnie, a U.S. citizen who uses the calendar year as his tax year and the cash method of accounting, operates a sole proprietorship in Country Z. In Year 1, he reports 500,000 doubles of pretax profits. On June 1 of Year 2, he pays Country Z income taxes of 150,000 doubles for calendar Year 1. Double-U.S. dollar exchange rates on various dates in Year 1 and Year 2 are as follows:

December 31, Year 1 4.00 doubles $1 (U.S.)
Year 1 average 3.75 doubles $1 (U.S.)
June 1, Year 2 4.25 doubles $1 (U.S.)

a. What is the U.S. dollar amount of Arnie’s foreign tax credit? In what year can Arnie claim the credit?
b. How would your answer to Part a change if Arnie elected to accrue his foreign income taxes on December 31 of Year 1, and filed his Year 1 U.S. income tax return on April 15 of Year 2?
c. What adjustment to the credit claimed in Part b would Arnie have to make when he pays his Country Z taxes on June 1 of Year 2?


Click here for the solution: Arnie, a U.S. citizen who uses the calendar year as his tax year and the cash method of accounting, operates a sole proprietorship in Country Z

During the current year, Manuel, a nonresident alien, conducts a U.S. business

C:16-17 During the current year, Manuel, a nonresident alien, conducts a U.S. business. He earns $100,000 in sales commissions and $25,000 of interest income. What factor(s) do U.S. taxing authorities consider to determine whether the interest is investment income not subject to U.S. taxation or business income subject to U.S. taxation?


Click here for the solution: During the current year, Manuel, a nonresident alien, conducts a U.S. business