Facts of the case: ABC, a US based corporation that manufactures and sells garden equipment worldwide, has a 100% owned subsidiary operating in the United Kingdom. The subsidiary has an independent management that decides which of the products produced by the ABC parent it will sell and at what price. The subsidiary also produces and sells its own brand garden equipment locally. Sixty percent of the subsidiary's sales are denominated in sterling (the local currency) associated with selling its own brand garden equipment and 40% are in US dollars (selling products produced by ABC). The subsidiary has local employees who are paid monthly in sterling and which represents 70% of the subsidiary operating expenses.

To finance its operations, the subsidiary borrows $10 million (US dollars) from its US parent with US dollar interest due @ 6 % annually, with interest payable quarterly and the full principal due in 5 years. The subsidiary has borrowed an equivalent amount of pound sterling from local banks on similar terms.

The subsidiary has been profitable for the last 3 years. Earnings of the subsidiary are retained in the UK, meaning no dividends are paid to the parent. Cash flow from operations is typically invested into short term marketable debt securities denominated in either pounds or euros.

Answer the following two questions . Provide codification citations directly after the answer in the form ###-##-## and attach and highlight with highlighter pen (or underline) the specific language you used to support each answer.

1. What is your recommendation as to the choice of functional currency for the UK subsidiary. Indicate the reasons for your recommendation and "cut and paste "support from the FASB codification. The reasons and citations are more important than a "correct" recommendation. (2 points)

2. Is ABC permitted to have two functional currencies in its UK subsidiary. Indicate your answer as well as "cut and paste" authoritative support from the FASB codification. If your answer is yes, indicate which functional currencies you would use for which aspects of the business. If your answer is no, indicate the specific FASB Codification section supporting your response. (3 points)

Answer rating: 100% (QA)

1 In keeping with FASB Statement No 52 associate entitys practical currency is that the currency of ... View the full answer