Chapter 15, Problem 3PA

a.

To determine

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.

Explanation of Solution

(1) The calculation based on Company G pesos pre-tax income is as follows:

$\begin{array}{c}\begin{array}{l}\text{Amount}\text{of}\text{bonus}\text{based}\text{on}\text{Pesos}\\ \text{pre-tax}\text{income}\text{of Company G}\end{array})\text{=}\left(\begin{array}{l}\text{Company G}\text{pesos}\text{pretax}\text{income}\text{×}\text{Predetermined}\\ \text{bonus percentage}\text{of}\text{pretax}\text{annual}\text{income}\end{array}\right)\\ \text{=}\text{MXN}\text{4,000,000×15\%}\\ \text{=MXN}\text{600,000}\end{array}$

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:

$\begin{array}{c}\begin{array}{l}\text{Amount}\text{of}\text{bonus}\text{based}\text{on}\text{dollars }\\ \text{pre-tax}\text{income}\text{of comapny G}\end{array})\text{=}\left(\begin{array}{l}\text{Pre-tax}\text{income of Comapny G in dollars}\text{×}\\ \text{Predetermined}\text{percentage}\text{of}\text{pre-tax}\text{annual}\text{income}\end{array}\right)\\ \text{=(\$}\text{600,000)×15\%}\\ \text{=(\$90,000)}\text{or}\text{no}\text{bonus}\end{array}$

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:

$\begin{array}{c}\begin{array}{l}\text{Conversion}\text{of}\text{Company}\text{G}\text{pesos}\\ \text{pre-tax}\text{inome}\text{into}\text{dollars}\end{array})\text{=}\frac{\text{Current}\text{Exchange}\text{rate}\text{in}\text{dollars}}{\text{Company G}\text{pesos}\text{pre-tax}\text{income}}\\ \text{=}\frac{\text{0}\text{.0570}\text{in}\text{dollars}}{\text{MXN}\text{600,000}}\\ \text{=\$34,002}\text{bonus}\end{array}$

Note: The value of current exchange rate is taken from Exhibit 15-7.

b.

To determine

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. (1) Sales and
2. (2) Expenses.

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:

$\begin{array}{c}\text{Average}\text{exchange}\text{rate}\text{=}\frac{\text{Sales}\text{of}\text{Company}\text{G in}\text{dollars}}{\text{Sales}\text{of}\text{Company}\text{G }\text{in}\text{MXN}}\\ \text{=}\frac{\text{\$6,000}}{\text{MXN}\text{80,000}}\\ \text{=\$}\text{.075/}\text{pesos}\end{array}$

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

$\begin{array}{c}\text{Average}\text{exchange}\text{rate}\text{=}\frac{\text{Expenses}\text{of}\text{Company}\text{G}\text{in}\text{dollars}}{\text{Expenses}\text{of}\text{Company G in MXN}}\\ \text{=}\frac{\text{\$6,600}}{\text{MXN}\text{76,000}}\\ \text{=\$}\text{.08684/}\text{pesos}\end{array}$

Therefore, the average exchange rate is $0.08684/ pesos.

Note: MXN is the currency unit of Mexico.

c.

To determine

Explain the way in which global products of Country M’s pre-tax income became a dollar pre-tax loss.

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.

To determine

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.

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?