Question

Problem 15.3A Exchange Rates and Performance Evaluation (LO15-4)

A U.S.-based company, Global Products Inc., has wholly owned subsidiaries across the world. Global Products Inc. sells products linked to major holidays in each country.

The president and board members of Global Products Inc. believe that the managers of their wholly owned country-level subsidiaries are best motivated and rewarded with both annual salaries and annual bonuses. The bonuses are calculated as a predetermined percentage of pretax annual income.

Señora Larza, the president of Global Products of Mexico, has worked hard this year to make her Mexican subsidiary profitable. She is looking forward to receiving her annual bonus, which is calculated as a predetermined percentage (15 percent) of this year’s pretax annual income earned by Global Products of Mexico. A condensed income statement for Global Products of Mexico for the most recent year is as follows (amounts in thousands of pesos).

Sales	MXN	80,000
Expenses		76,000
Pretax Income	MXN	4,000

The U.S. headquarters financial group translates each of its wholly owned subsidiary’s results into U.S. dollars for evaluation. After translating the Mexican pesos income statement into U.S. dollars, the condensed income statement for Global Products of Mexico is as follows (amounts in thousands of dollars).

Sales	US	$	6,000
Expenses			6,600
Pretax Income	US	$	(600	)

Required:

a-1. Calculate the bonus amount based on (1) the Mexican peso-based Pretax Income and (2) the U.S. dollar-based Pretax Income.

a-2. Translate the peso-based bonus to U.S. dollars using a current exchange rate in Exhibit 15-7.

b. Calculate the average exchange rate used to translate the Mexican pesos income statement into the U.S. dollar statement for the categories: (1) Sales and (2) Expenses. (Round your answers to 5 decimal places.)

i don't seem to get the a-1 right. Any help?

Answer 1

Ans: Global Products Inc.'s Mexican subsidiary

Annual bonus to Manager's as predetermined percentage of pretax profits.

Bonus to Manager of Mexican Subsidiary

1-a If Pretax profit in Mexican peso is considered for Annual bonus

Pretax profit (amount in thousands of MXN) MXN 4,000

Bonus Rate 15%

Annual bonus (amount in thousands of MXN) MXN 600

If Pretax profit in US $ is considered for Annual bonus

Pretax profit (amount in thousands of $) ($ 600)

Bonus Rate 15%

Annual bonus (amount in thousands of $) Nil

The question is correct as for conversion of Sales and Expenses from functional currency (MXN) to Presentation currency ($) the rate exist on the date of sales or expenses is to be considered which may be different. In the above question expenses in US $ is more the sales in US $  whereas in MXN the Sales are more than  Expenses this may be due to exchange rate exist on the date of sales is less than exchange rate exist on date of Expenses incurred.