Posted: September 21st, 2015

Case Study: Regents Corporation

 
Case 6-1:
Regents Corporation is a recently acquired U.S. manufacturing subsidiary located on the outskirts of London. Its products are marketed principally in the United Kingdom, with sales invoiced in pounds and prices determined by local competitive conditions. Expenses (labor, materials, and other production costs) are mostly local, although a significant quantity of components is now imported from the U.S. parent. Financing is primarily in U.S. dollars provided by the parent.
Headquarters management must decide on the functional currency for its London operation: Should it be the U.S. dollar or the British pound? You are asked to advise management on the appropriate currency designation and its relative financial statement effects. Prepare a report that supports your recommendations and identify any policy issues your analysis uncovers.
Exhibit 6-14 presents comparative balance sheets for Regents Corporation at December 31, 20X7 and 20X8, and a statement of income for the year ended December 31, 20X8. The statements conform with U.S. generally accepted accounting principles prior to translation to dollars.

Exhibit 6-14: Regents Corporation Financial Statements
Balance Sheet 12/31/X7 12/31/X8
Assets
Cash £ 1,060 £ 1,150
Accounts receivable 2,890 3,100
Inventory (FIFO) 3,040 3,430
Fixed Assets 4,400 4,900
Accumulated depreciation (420) (720)
Intangible assets (patents) 70
Total £ 10,970 £ 11,930
Liabilities and Stockholders’ Equity
Accounts payable £ 1,610 £ 1,385
Due to parent 1,800 1,310
Long-term debt 4,500 4,000
Deferred taxes 80 120
Common Stock 1,500 1,500
Retained earnings 1,480 3,615
Total £ 10,970 £ 11,930
Income Statement Year Ended 12/31/X8
Sales £ 16,700
Expenses
Cost of Sales £ 11,300
General and administrative 1,600
Depreciation 300
Interest 480 13,680
Operating Income 3,020
Transaction gain (loss) 125
Income before taxes 3,145
Income taxes Current £ 670
Deferred 40 710
Net income £ 2,435
Retained earnings at 12/31/X7 (residual) 1,480
3,915
Dividends 300
Retained earnings at 12/31/X8 £ 3,615
Exchange rate information and additional data:
1. Exchange rates:
December 31, 20X7 $ 1.80 = £ 1
December 31, 20X8 $ 1.90 = £ 1
Average during 20X8 $ 1.86 = £ 1
Average during the fourth quarter 20X7 $ 1.78 = £ 1
Average during the fourth quarter 20X8 $ 1.88 = £ 1

2. Common stock was acquired, long-term debt issued, and original fixed assets purchased when the exchange rate was $ 1.70 = £ 1.
3. Due to parent account is denominated in U.S. dollars
4. Exchange rate prevailing when the intangible asset (patent) was acquired and additional fixed assets purchased was $ 1.82 = £ 1.
5. Purchases and dividends occurred evenly during 20X8.
6. Of the £ 300 depreciation expense for 20X8, £ 20 relates to fixed assets purchased during 20X8.
7. Deferred taxes are translated at the current rate.
8. Inventory represents approximately 3 months of production.
Required:
• 1. Regents Corporation – follow the case 6-1 as stated in the problem. Support your recommendations that you submit to management – have a memo or report, analyses, and references. See Note and remember to cite your sources.
• 2. Regents Corporation – follow the case 6-1 except all operations and financing are in British pounds. Support your recommendations that you submit to management – have a memo or report, analyses and references. See Note and remember to cite your sources.
NOTE:
For both Case Study I and Case Study II   view each problem as if it were a presentation to a company CEO, CFO, or board. In addition to computational accuracy, critical thinking, professionalism, communication, and presentation weigh heavily in the evaluation of the assignment. There are a number of ways that the case study might be presented to a CEO, CFO or board – explanations, analysis, charts, etc. are some examples. Remember – do not copy the publisher’s solutions manual. This must be in your own words and you must support your work with analysis.

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