Johnston Co. Ltd. is a medium- sized Canadian company, incorporated in 20X1, whose shares are traded on
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The company’s strategic plan calls for steady growth in sales and earnings. Accordingly, expansion into the lucrative United States market in 20X7 is under serious consideration. A major concern is changes in the exchange rate of the Canadian and American dollar because the company has received very different predictions from various analysts with respect to this.
Johnston is considering the following proposals. The first proposal involves setting up sales offices in the United States with orders filled from Johnston’s Canadian warehouses. The sales offices would be responsible for sales, billing, and collections. All transactions would be in US dollars.
Alternatively, Johnston is considering establishing a wholly owned subsidiary in the United States to process and distribute a full line of specialty foods. It has not yet decided how to finance the purchase of the plant and equipment for this subsidiary.
The president has asked you, the controller, to prepare a report for possible use at a meeting of the board of directors. Specifically, he wants you to recommend which of the above proposals is preferable with respect to the impact of each on current and future income. He wants you to fully support your recommendation and to limit your discussion to foreign-currency translation issues, ignoring hedging and income tax considerations.
Required
Prepare the report for the president.
Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...
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Related Book For
Advanced Financial Accounting
ISBN: 978-0137030385
6th edition
Authors: Thomas Beechy, Umashanker Trivedi, Kenneth MacAulay
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