Part I

On August 1, 2008, William signed a noncancelable order to purchase a machine from a company located in Japan. The contracted price was 6,000,000 yen, payable on January 31, 2009. The machine will be delivered to William on November 1, 2008.

In order to hedge against a strengthening of the yen, William entered into a forward exchange contract on August 1, 2008, to purchase 6,000,000 yen on January 31, 2009.

On November 1, 2008, the transaction date, the US company received the machine from the Japanese company. Spot and forward exchange rates on various dates follow:

Spot Rate ($/1 yen) Forward Exchange Rate ($/1 yen)

August 1, 2008 $0.0080 $0.0084

November 1, 2008 $0.0085 $0.0087

December 31, 2008 $0.0083 $0.0086

January 31, 2009 $0.0090

Tasks:

generate all journal entries in Microsoft Excel for William that pertain to the acquisition of the machine and the forward exchange contract. Assume a December 31 year-end.

Part II

As the international aspects of William’s business continue to expand, William purchases a controlling interest in Parisian Co., a French company located in Paris. Parisian has the euro as its local currency.

Your manager is vaguely aware that the designation of the functional currency for Parisian may have significant and potentially different consequences for the consolidated financial statements of the parent company and its foreign subsidiaries. Being mindful of the bottom line, your manager makes it clear to you that he or she would strongly prefer that you choose the functional currency that would be likely to have the most favorable (or least negative) potential impact on consolidated net income.

Tasks:

Draft a one- to two-page memorandum in Microsoft Word document in response to your manager’s concerns. Address the following specific points:

  • In which currency will the year-end consolidated financial statements be prepared?
  • Will the financial statements be translated or remeasured? How will you determine this? Explain the rationale for your answer.
  • How would an asset such as Buildings be accounted for using each method (translation vs. remeasurement)?

use succinct but complete communication and avoid the use of accounting jargon, given the nature of the audience.