Question

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 25,000
Expenses 23,000
Pretax Income MXN 2,000
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 $7,000
Expenses 8,100
Pretax Income US $(1,100)
Required:
A1. Calculate the bonus amount based on (1) the Mexican peso-based Pretax Income and (2) the U.S. dollar-based Pretax Income.
A2. Translate the peso-based bonus to U.S. dollars using a current exchange rate.
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.
A1. Bonus on mexican peso-based Pretax Income
Bonus U.S. dollar-based Pretax Income
A2. U.S. dollars
B. Average exchange rate for sales pesos
Average exchange rate for expenses pesos

Answer 1

Global Products Inc.

Global Products of Mexico

Señora Larza

A1. Bonus on mexican peso-based Pretax Income

= MXN 2,000 x 15% = MXN 300

Bonus U.S. dollar-based Pretax Income

= -$1,100 x 15% = -$165, there is no U.S. dollar-based bonus

A2. U.S. dollars

Current Exchange rate = US$1 = MXN 20.0369 (July 18, 2020)

MXN 2,000 = MXN 2,000/MXN 20.0369 = $98.19

B. Average exchange rate for sales pesos

Sales MXN 25,000 = US $7,000,

The exchange rate = US $1 = MXN 3.5714 (MXN 25,000/ US $7,000)

Average exchange rate for expenses pesos

Expenses MXN 23,000 = US $ 8,100

The exchange rate = US $1 = MXN 2.8395 (MXN 23,000/US $ 8,100)

Step-by-step explanation:

Señora Larza, the president of Global Products of Mexico seems to have a bonus in Mexican peso, but when the bonus pre-tax income is translated into US dollars, the bonus turns negative just like the pre-tax income was negative. This implies that since the U.S. headquarters translates each subsidiary's results into U.S. dollars for evaluation, Señora Larza did not qualify for bonus payment for the current year.

The disparity is caused by the different exchange rates for translating the sales revenue and the expenses. Exchange rates are the rates at which currencies exchange their values for international account settlements.