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Concept explainers
a.
Calculate the amount of bonus based on;
(1) Company G peso-based pre-tax income.
(2) Company G dollar-based pre-tax income. Translate the peso-based bonus of Company G into dollars using current exchange rate.
a.
![Check Mark](/static/check-mark.png)
Explanation of Solution
(1) The calculation based on Company G pesos pre-tax income is as follows:
Amount of bonus based on Pesos pre-tax income of Company G)= (Company G pesos pretax income × Predetermined bonus percentage of pretax annual income)= MXN 4,000,000×15%=MXN 600,000
Therefore, the peso-based bonus for Company G is MXN 600,000.
(2) The calculation based on Company G dollar-based pre-tax income is as follows:
Amount of bonus based on dollars pre-tax income of comapny G)=( Pre-tax income of Comapny G in dollars × Predetermined percentage of pre-tax annual income)=($ 600,000)×15%=($90,000) or no bonus
Therefore, the dollar-based bonus for Company G is ($90,000) or no bonus.
Convert the Company G pesos pre-tax income in to Company G dollars using current exchange rate:
Conversion of Company G pesos pre-tax inome into dollars ) = Current Exchange rate in dollarsCompany G pesos pre-tax income= 0.0570 in dollarsMXN 600,000=$34,002 bonus
Note: The value of current exchange rate is taken from Exhibit 15-7.
b.
Calculate the average exchange rate that is used to translate the Company G’s pesos income statement into the Company G’s dollar statement for the categories:
- (1) Sales and
- (2) Expenses.
b.
![Check Mark](/static/check-mark.png)
Explanation of Solution
The average exchange rate that is used to translate the Company G pesos income statement into the Company G dollar statement for sales is calculated as follows:
Average exchange rate = Sales of Company G in dollarsSales of Company G in MXN=$6,000MXN 80,000=$.075/ pesos
Therefore, the average exchange rate is $0.075/ pesos.
The average exchange rate that is used to translate the Company G pesos income statement into the Company G dollar statement for expenses is calculated as follows
Average exchange rate = Expenses of Company G in dollarsExpenses of Company G in MXN=$6,600MXN 76,000=$.08684/ pesos
Therefore, the average exchange rate is $0.08684/ pesos.
Note: MXN is the currency unit of Mexico.
c.
Explain the way in which global products of Country M’s pre-tax income became a dollar pre-tax loss.
c.
![Check Mark](/static/check-mark.png)
Explanation of Solution
The way in which global products of Country M’s pre-tax income became a dollar pre-tax loss is listed as follows:
- The difference in the average exchange rates is caused by translation timing differences.
- For example, Sales may clutch around holidays, but expenses for cost of sales remains continuous over the year.
- The procedures to create the translated statement by Incorporation G might cause the disparities in the average exchange rate.
d.
Explain a reason for which the dollar-based pre-tax income would be appropriate for evaluating Person S and a reason for which the peso-based pre-tax income would be appropriate for evaluating Person S and state the option that is appropriate.
d.
![Check Mark](/static/check-mark.png)
Explanation of Solution
There is no clear answer to this question but certain issues that can be discussed are as follows:
- Does Person S have the ability to “control” USD income?
- If the objective is to generate profits that can be distributed to Company G stockholders, the dollar based pre-tax income may be appropriate.
- What is the Incorporation G’s subsidiary objective?
- If it is market penetration, then sales may be a better basis for performance evaluation.
- Do the translation procedures that result in a USD pre-tax loss make economic sense?
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Financial & Managerial Accounting
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