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Microsoft Word - ACCT 518 FINAL EXAM SP 2019 1 BOISE STATE UNIVERSITY ACCT 518: INTERNATIONAL FINANCIAL REPORTING FINAL EXAM SPRING 2019 Name: ____________________________________________________________________________ This exam consists of six parts. The allocation of exam grade points is as follows: Part I: 24 points Part II: 24 points Part III: 46 points Part IV: 27 points Part V: 21 points Part VI: 28 points Total: 170 points This exam is “open book,” which means you are permitted to use any materials handed out in class, your own notes from the course, the text book, and anything on the ACCT 518 course website. The exam must be taken completely alone. Showing it or discussing it with anyone is forbidden. Refer to the Blackboard course announcement relating to this exam for the exam due date. The exam may be submitted electronically via email. The exam is to be submitted as a single Microsoft Word or Google Docs document, with a minimum 11- point font size. If your exam submission is handwritten, answers must be clearly legible. 2 Part I (24 points): Ho-Ho-Kus Company (a U.S.-based company) has a subsidiary in Mexico that exports all of its production to customers in Asian markets and sources all its inputs locally. Budgets in Mexican pesos (MXN) and U.S. dollars (USD) using the beginning of period exchange rate of USD 0.08 per MXN 1.00 are as follows: MXN USD Sales 40,000,000 3,200,000 Costs 30,000,000 2,400,000 Profit 10,000,000 800,000 During the budget period, the MXN decreased in value by 25 percent against world currencies, such that the end-of-period exchange rate was USD 0.06 per MXN 1.00. Assuming that Ho-Ho-Kus uses the end-of- period exchange rate to track actual performance, actual results in MXN and USD are as follows: MXN USD Sales 45,000,000 2,700,000 Costs 35,500,000 2,130,000 Profit 9,500,000 570,000 As a result, there is an unfavorable total budget variance of MXN 500,000 and an unfavorable total budget variance of USD 230,000. Required: a. Determine the amount of the USD 230,000 unfavorable total budget variance caused by a change in the USD/MXN exchange rate. (Note: there are two possible solutions.) b. Taking economic exposure to foreign exchange risk into consideration, estimate what profit would have been (in both MXN and USD) if the Mexican subsidiary’s manager had taken full advantage of the decrease in value of the MXN. 3 Part II (24 points): Vandelay Industries uses a number of performance criteria to evaluate its foreign operations, including return on investment. Compagnie de Charlevoix, its Canadian subsidiary based in the Province of Quebec, submits the income statement shown below for the current fiscal year (translated to U.S. dollar equivalents): Compagnie de Charlevoix Income Statement Sales $4,200,000 Other income 120,000 $4,320,000 Costs and expenses: Cost of goods sold $3,200,000 Selling and administrative expense 330,000 Depreciation expense 160,000 Interest expense 162,000 Foreign exchange losses 368,000 4,220,000 Income before taxes $ 100,000 Income taxes 33,000 Net income $ 67,000 Included in sales are components worth $500,000 (arm’s length sales price per unit times number of units) that were sold by Compagnie de Charlevoix to its sister subsidiary in Czechia at a transfer price set by corporate headquarters at 40 percent above the arms-length price per unit. Cost of goods sold includes excess labor costs of $150,000 owing to local labor laws. Administrative expenses include $50,000 of headquarters expenses, which Vandelay allocates to Compagnie de Charlevoix. Local financing decisions are centralized at corporate treasury at Vandelay headquarters in New Orleans, as are all matters related to tax planning. Vandelay assesses Compagnie de Charlevoix a capital charge based on Charlevoix’s net assets and the parent company’s (i.e. Vandelay’s) average cost of capital. This figure, which amounts to $120,000, is included in the $162,000 interest expense figure. One-half of the exchange gains and losses figure is attributed to transactions losses resulting from Charlevoix’s export activities. The balance is due to translating the Canadian accounts to U.S. dollars for consolidation purposes. Exchange risk management is also centralized at corporate treasury. Required: Based on the foregoing information, prepare an income statement based on controllable profit to be used in evaluating the performance of the manager of Compagnie de Charlevoix for the current year. 4 Part III (46 points): Cabano Ltée., a Canadian company, imports parts from its Hungarian subsidiary that are used in the production of widgets. Part 185 costs the Hungarian subsidiary C$10.00 per unit to produce and C$2.00 per unit to ship to Cabano Ltée. Cabano uses part 185 to produce widgets that it sells to other manufacturers for C$52.00 per widget. The following tax rates apply: Hungarian income tax 17% Canadian income tax 26.5% Canadian import duty 20% of invoice price Required: a. Determine the total amount of income taxes and import duties paid to the Canadian and Hungarian governments if part 185 is sold to Cabano Ltée. at a price of C$20.00 per unit. b. Determine the total amount of income taxes and import duties paid to the Canadian and Hungarian governments if part 185 is sold to Cabano Ltée. at a price of C$30.00 per unit. c. Explain why the results obtained in parts (a) and (b) differ. 5 Part IV (27 points): The British trading company Heseltine Ltd. exhibits the following sales revenue pattern (in thousands of British pounds): 2009 2010 2011 Sales revenue £23,500 £28,650 £33,160 Required: a.) Perform a convenience translation into U.S. dollars for each year given the following exchange rates: 2009 $2.10 = £1 2010 $2.20 = £1 2011 $1.60 = £1 b.) Compare the year-to-year percentage changes in sales revenues in pounds and in U.S. dollars. Do the two time series move in a parallel fashion? Why or why not? c.) What method would minimize the effect of exchange rate changes on foreign currency trend data? 6 Part V (21 points): Fintel Corporation, a Finnish manufacturer of cellular telephones, wishes to invoice a French sales affiliate for an order of 12,000 units. Relevant facts on a per unit basis are as follows: Net sales price charged by the French sales affiliate to retail customers, €450; other operating expenses borne by the French sales affiliate, €63. The French sales affiliate also bears freight and insurance costs of €1 per unit and packaging costs of €1.50 per unit. The French sales affiliate pays custom duties of 5 percent. Sales affiliates of other manufacturers of cellular telephones similar to those Fintel produces for the French market earn gross profit margins of 6 percent on sales to retail customers in France. Required: Calculate a transfer price between Fintel and its French sales affiliate such that the French affiliate covers all its costs and earns an appropriate gross profit. 7 Part VI (28 points): The financial statements of Konda Enterprises, based in Scythia, have been prepared in accordance with Scythian GAAP. As a financial analyst, your boss has tasked you with the responsibility of restating Konda’s financial statements from Scythian GAAP to U.S. GAAP in order to assess Konda’s financial position and profitability on a U.S. GAAP basis. Konda’s Scythian GAAP financial statements are as follows: Konda Enterprises Income Statement Year Ended December 31, 2018 (Amounts in thousands of foreign currency units (FC)) Sales FC 2,000 Cost of sales 1,000 Selling, general and administrative expense 200 Other expenses (income) (100) Income before taxes 800 Income taxes (10% income tax rate) 80 Net income FC 720 Konda Enterprises Statement of Retained Earnings Year Ended December 31, 2018 (Amounts in thousands of foreign currency units (FC)) Retained earnings, January 1, 2018 FC 500 Net income 720 Retained earnings, December 31, 2018 FC 1,220 Konda Enterprises Balance Sheet December 31, 2018 (Amounts in thousands of foreign currency units (FC)) Cash FC 500 Inventory 600 Property, plant, and equipment, net 970 Total assets FC 2,070 Accounts payable FC 130 Other current liabilities 70 Deferred liabilities 50 Pension liabilities 600 Total liabilities FC 850 Retained earnings 1,220 Total liabilities and equity FC 2,070