Accounts are listed below for a foreign subsidiary that maintains its books in its local currency

Exercise 13-1 Identifying the Exchange Rate

Accounts are listed below for a foreign subsidiary that maintains its books in its local currency. The equity interest in the subsidiary was acquired in a purchase transaction. In the space provided, indicate the exchange rate that would be used to translate the accounts into dollars assuming that the functional currency was identified (a) as the U.S. dollar and (b) as the foreign entity’s local currency. Use the following letters to identify the exchange rate:

H—historical exchange rate
C—current exchange rate
A—average exchange rate for the current period
Exchange Rate if the
Functional Currency Is:
Account U.S. Dollar Local Currency

Cash _____ __________
Accounts receivable _____ __________
Inventory carried at cost _____ __________
Inventory carried at market _____ __________
Prepaid rent _____ __________
Property, plant, and equipment _____ __________
Goodwill _____ __________
Accounts payable _____ __________
Bonds payable _____ __________
Unamortized premium on bonds payable _____ __________
Preferred stock carried at issuance price _____ __________
Common stock _____ __________
Sales _____ __________
Cost of goods sold _____ __________
Depreciation expense

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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.

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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?


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What advantages does a cash method taxpayer gain by electing to accrue foreign taxes for foreign tax credit purposes?

C:16-8 What advantages does a cash method taxpayer gain by electing to accrue foreign taxes for foreign tax credit purposes?


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Why is it important for a foreign national to ascertain whether he or she is a resident of the United States?

C:16-2 Why is it important for a foreign national to ascertain whether he or she is a resident of the United States?


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Becky Knauer recently resigned from her position as controller for Shamalay Automotive, a small, struggling foreign car dealer in Upper Saddle River, New Jersey

Chapter 16 Ethical Issue 16-1 Becky Knauer recently resigned from her position as controller for Shamalay Automotive, a small, struggling foreign car dealer in Upper Saddle River, New Jersey. Becky has just started a new job as controller for Mueller Imports, a much larger dealer for the same car manufacturer. Demand for this particular make of car is exploding, and the manufacturer cannot produce enough to satisfy demand. The manufacturer's regional sales managers are each given a certain number of cars. Each sales manager then decides how to divide the cars among the independently owned dealerships in the region. Because of high demand for these cars, dealerships all want to receive as many cars as they can from the regional sales manager.

Becky's former employer, Shamalay Automotive, receives only about 25 cars a month. Consequently, Shamalay was not very profitable.

Becky is surprised to learn that her new employer, Mueller Imports, receives over 200 cars a month. Becky soon gets another surprise. Every couple of months, a local jeweler bills the dealer $5,000 for “miscellaneous services.” Franz Mueller, the owner of the dealership, personally approves payment of these invoices, noting that each invoice is a “selling expense.” From casual conversations with a salesperson, Becky learns that Mueller frequently gives Rolex watches to the manufacturer's regional sales manager and other sales executives. Before talking to anyone about this, Becky decides to work through her ethical dilemma.

Requirement
Put yourself in Becky's place.
a. What is the ethical issue?
b. What are your options?
c. What are the possible consequences?
d. What should you do?


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