In which of the following circumstances surrounding a Mexican subsidiary of an U.S.parent is the peso most likely to be considered the functional currency?
A)Sales are made globally and collected in U.S.dollars.Plant uses local materials and labor and pays in pesos.Intercompany transaction volume is high.
B)The Mexican subsidiary sells product only in Mexico and receives pesos.The materials and labor are also secured in Mexico and paid for with pesos.
C)The Mexican subsidiary receives their debt capital from a U.S.bank in dollars and products produced are sold globally for U.S.dollars.
D)Raw materials are acquired from the parent and paid for in U.S.dollars.Labor is acquired locally and paid in pesos.Financing is secured from the parent in U.S.dollars.

Question

In which of the following circumstances surrounding a Mexican subsidiary of an U.S.parent is the peso most likely to be considered the functional currency?
A)​Sales are made globally and collected in U.S.dollars.Plant uses local materials and labor and pays in pesos.Intercompany transaction volume is high.
B)​The Mexican subsidiary sells product only in Mexico and receives pesos.The materials and labor are also secured in Mexico and paid for with pesos.
C)​The Mexican subsidiary receives their debt capital from a U.S.bank in dollars and products produced are sold globally for U.S.dollars.
D)​Raw materials are acquired from the parent and paid for in U.S.dollars.Labor is acquired locally and paid in pesos.Financing is secured from the parent in U.S.dollars.

Quizplus · Accepted Answer

In option B, all the transactions are happening in pesos, including sales, raw materials, and labor. Therefore, the functional currency of the Mexican subsidiary is likely to be the peso. In option A, the collection is made in dollars, and intercompany transactions are high, which makes it less likely that peso will be the functional currency. In option C, the products are sold globally in dollars, making it less likely that peso will be the functional currency. In option D, raw materials are acquired and paid for in dollars, and financing is also secured in dollars, making it less likely that peso will be the functional currency.

In Which of the Following Circumstances Surrounding a Mexican Subsidiary