Microsoft Word - ACCT 518 FINAL EXAM SP 2019
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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: XXXXXXXXXXpoints
Part VI: XXXXXXXXXXpoints
Total: XXXXXXXXXXpoints
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 fo
idden.
Refer to the Blackboard course announcement relating to this exam for the exam due date. The exam may
e 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.
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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, XXXXXXXXXX,000
During the budget period, the MXN decreased in value by 25 percent against world cu
encies, 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, XXXXXXXXXX,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.)
. 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.
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Part II (24 points):
Vandelay Industries uses a number of performance criteria to evaluate its foreign operations, including
eturn on investment. Compagnie de Charlevoix, its Canadian subsidiary based in the Province of Quebec,
submits the income statement shown below for the cu
ent 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 XXXXXXXXXX,000
Depreciation expense XXXXXXXXXX,000
Interest expense XXXXXXXXXX,000
Foreign exchange losses XXXXXXXXXX,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
ased 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 cu
ent year.
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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.
. 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.
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Part IV (27 points):
The British trading company Heseltine Ltd. exhibits the following sales revenue pattern (in thousands of
British pounds):
XXXXXXXXXX XXXXXXXXXX
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
ates:
2009 $2.10 = £1
2010 $2.20 = £1
2011 $1.60 = £1
.) 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 cu
ency trend data?
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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.
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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 cu
ency units (FC))
Sales FC 2,000
Cost of sales XXXXXXXXXX,000
Selling, general and administrative expense XXXXXXXXXX
Other expenses (income XXXXXXXXXX)
Income before taxes XXXXXXXXXX
Income taxes (10% income tax rate XXXXXXXXXX
Net income XXXXXXXXXXFC 720
Konda Enterprises
Statement of Retained Earnings
Year Ended December 31, 2018
(Amounts in thousands of foreign cu
ency units (FC))
Retained earnings, January 1, XXXXXXXXXXFC 500
Net income XXXXXXXXXX
Retained earnings, December 31, XXXXXXXXXXFC 1,220
Konda Enterprises
Balance Sheet
December 31, 2018
(Amounts in thousands of foreign cu
ency units (FC))
Cash XXXXXXXXXXFC 500
Inventory XXXXXXXXXX
Property, plant, and equipment, net XXXXXXXXXX970
Total assets FC 2,070
Accounts payable FC 130
Other cu
ent liabilities 70
Defe
ed liabilities 50
Pension liabilities XXXXXXXXXX
Total liabilities FC 850
Retained earnings XXXXXXXXXX,220
Total liabilities and equity FC 2,070