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Global International Corp. (GIC) has three subsidiaries: GIC Europe whose local currency is
the euro and whose functional currency is the euro; GIC China whose local currency is the
yuan and whose functional currency is the Hong Kong dollar; and GIC Bahamas whose local
currency is the Bahamian dollar and whose functional currency is the U.S. dollar. GIC's
reporting currency is the U.S. dollar. Which conversion methods should be used by GIC for
each of its subsidiaries?
A)
The financial data for all three subsidiaries should be remeasured under the
temporal method.
B)
GIC Europe’s data should be remeasured under the temporal method; GIC China’s
data should be remeasured under the temporal method into Hong Kong dollars,
and then translated under the current rate method into U.S. dollars; and GIC
Bahamas’ data should be translated under the current rate method into U.S. dollars.
C)
GIC Europe’s data should be translated under the current rate method; GIC China’s
data should be remeasured under the temporal method into Hong Kong dollars,
and then translated under the current rate method into U.S. dollars; and GIC
Bahamas’ data should be remeasured under the temporal method into U.S. dollars.
Wasson Brothers (WB) is a large U.S. based conglomerate with many subsidiaries in both the
U.S. and abroad. One of WB's wholly-owned foreign subsidiaries, Kasamatsu Industries, is
based in Japan. Kasamatsu manufactures a hugely successful line of trading cards, toys, and
related products. All of Kasamatsu's operations and sales take place in Japan, and the
corresponding transactions are denominated in Japanese yen. Additionally, Kasamatsu's
books and records are all maintained in yen. WB reports its earnings in U.S. dollars. The
history of the exchange rate between the dollar and the yen over the last two years is
presented in the following table. Figures are presented in yen/$.
Yen/Dollar Exchange Rate
December 31, 2013
150
December 31, 2012
130
2013 Average
140
2012 Average
120
Exchange rate on date that 2013 dividends were
declared by Kasamatsu
145
Exchange rate on date of stock issue and acquisition of
fixed assets.
100
Shelly Jameson is an analyst with Henderson-Wells, an investment banking firm in New York,
and is the chief analyst covering WB. She believes that the enormous success of the trading
cards has contributed greatly to WB's bottom line. However, Jameson believes that this
effect may be misstated in the company's financial statements because of the recent
volatility in exchange rates. Many analysts at other investment banking firms have been
raising their ratings on WB because of the recent earnings growth. Jameson, however, wants
to be absolutely certain that these results are accurate and fully attributable to Kasamatsu's
hot new product and not a result of an exchange rate fluctuation. The following are the
financial statements of Kasamatsu, stated in thousands of yen.
Financial Statements for Year Ending December 31, 2013
(in thousands of yen)
Statement of Income and Retained Earnings
Sales
700,000
Expenses
Cost of Goods Sold (COGS)
280,000
Depreciation
126,000
SG&A
77,000
Total Expenses
483,000
Earnings Before Taxes (EBT)
217,000
Income Tax Expense
98,000
Net Income
119,000
Retained Earnings: December 31, 2012
250,000
369,000
Dividends
58,000
Retained Earnings: December 31, 2013 *
311,000
* Retained earnings on 12/31/2013 were US $2 million
Balance Sheet
Assets
Cash and receivables
60,000
Inventory
180,000
Land
200,000
Fixed assets
346,000
Total assets
786,000
Liabilities and stockholders' equity
Liabilities
300,000
Capital stock
175,000
Retained earnings
311,000
Total liabilities and
stockholders' equity
786,000