ABC, a US based corporation that manufactures and sells garden equipment worldwi

Question

ABC, a US based corporation that manufactures and sells garden equipment worldwide, has a 100% owned subsidiary operating in the United Kingdom. The subsidiary has an independent management that decides which of the products produced by the ABC parent it will sell and at what price. Sixty percent of the subsidiary’s sales are denominated in sterling (the local currency), 30% are in US dollars and 10% are in euros. The subsidiary has local employees who are paid monthly in sterling and which represents 70% of the subsidiary operating expenses.

To finance its operations, the subsidiary borrows $10 million (US dollars) from its US parent with US dollar interest due @ 8 % annually, with interest payable quarterly and the full principal due in 5 years. The subsidiary has borrowed an equivalent amount of pound sterling from local banks on similar terms.

The subsidiary has been profitable for the last 3 years. Earnings of the subsidiary are retained in the UK, meaning no dividends are paid to the parent. Cash flow from operations is typically invested into short term marketable debt securities denominated in either pounds or euros.

1.What is your recommendation as to the choice of functional currency that the subsidiary should make. Indicate the reasons for your recommendation and find support in the codification which you must attach and highlight (with yellow marker). The reasons and citations are more important than a “correct” recommendation.

2. Is ABC permitted to have two functional currencies in its UK subsidiary. Indicate your answer as well as the highlighted authoritative support coming from the codification.   If your answer is yes, indicate which functional currencies you would use for which aspects of the business.  

Explanation / Answer

Question 1.

Functional currency shuld be such currency which must satisfy the following points:

The currency at which an entity retains its revenue and receipts from its operations and pay debts.

Form the question it is clear that functional currency should be sterling.

Question 2.

ABC will permit two currencies. That two currencies are sterling and Doller. Doller should be included as it is the currency of the Parent company "ABC" which produces products and estimates its cost in doller. Another reason to include is to take the advantage of getting loan from such cuntries which having lower interest rates.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.