A U.S.-based MNE has four operating units/subsidiaries in the U.S., Mexico, Germany, and Poland. The following are the operating relationships existing among them: 1. The U.S. supplies all production inputs to Mexico except for labor (invoiced in dollars) and all Mexican production is sold to the U.S. parent and invoiced in dollars.
2) Germany supplies all production inputs to Poland except for labor (invoiced in euros) and all Polish production is sold to Germany and is invoiced in euros.
3) The global marketplace for the company's products is divided into two non-overlapping areas, one supplied from the U.S. and the other one from Germany. Only when demand is particularly high in one region or the other is part of it supplied by other than the designated supplier.
In order to prepare consolidate financial statements, each subsidiary's financial statements must be translated into the reporting currency (the U.S. dollar). For each subsidiary, the functional currency is __________ and the required translation method is _______________.
A) U.S.: dollar, none; Mexico: peso, current rate; Germany: euro, current rate; Poland: zloty, current rate.
B) U.S.: dollar, none; Mexico: dollar, temporal; Germany: euro, current rate; Poland: euro, temporal to euros then current rate to dollars.
C) U.S.: dollar, none; Mexico: dollar, current rate; Germany: euro, current rate; Poland: dollar, temporal.
D) U.S.: dollar, none; Mexico: peso, temporal; Germany: euro, current rate; Poland: euro, current rate to euros then temporal to dollars.
E) None of the statements above is correct.

Question

Quizplus · Accepted Answer

The functional currency is determined by the primary economic environment in which the entity operates. For the U.S., it's the dollar with no translation needed. Mexico operates primarily with the U.S. in dollars, making its functional currency the dollar, but since it also incurs costs in pesos (labor), the temporal method is used for translation. Germany and Poland operate in euros, making the euro their functional currency. Poland's transactions are primarily with Germany in euros, but since it also incurs costs in zlotys, it first uses the temporal method to translate to euros, then the current rate method to translate to dollars.

A US-Based MNE Has Four Operating Units/subsidiaries in the U