International Accounting Exam 2- Chapters 7-9

Japanese branch of a U.S. corporation paid $4,200,000 in taxes to the government of Japan on income it generated there. The corporation is subject to a 35% tax rate in the U.S. How much tax will be owed to the U.S. government on the $10,000,000 of Japanese branch income?

$0

Information for Year 1, Year 2, and Year 3 for the Alpinian branch of Rawl Corporation is presented in the following table. The corporate tax rate in the Alpinian Republic in Year 1 was 11 percent. In Year 2, the Alpinian Republic increased its corporate income tax rate to 15 percent. In Year 3, the Alpinian Republic increased its corporate tax rate to 22 percent. The U.S. corporate tax rate in each year is 21 percent. In Year 3, how much excess foreign tax credit can Rawl carry back?

$1,000.

U.S. corporation is subject to an income tax rate of 35% and has a branch in the U.K., which paid the national corporate tax rate of 30% on its earnings there. The branch generated taxable income from operations in the U.K. equivalent to $2,000,000. What is the amount of the taxes owed to the U.S. government on the income generated in the U.K.?

$100,000

A foreign subsidiary of Wampoa Ltd. has one asset (inventory) and no liabilities. The subsidiary operates with a significant degree of autonomy from Wampoa and primarily uses the local currency (the won) in carrying out its transactions. Since the date the inventory was acquired, the won has decreased in value in relation to Wampoa's reporting currency. In translating the foreign subsidiary's won financial statements into the parent's reporting currency, which of the following is true under IFRS?

A negative translation adjustment must be reported in stockholders' equity.

What is an ad valorem import duty?

A tariff charged by a government on the invoice price of goods coming into its country

Which one of the following items is remeasured using the current exchange rate under the temporal method?

Accounts payable.

In deciding whether to establish a foreign operation, which factors) might a multinational corporation (MNC) consider?

All answers are correct.

Market-based transfer prices lead to optimal decisions in which of the following situations?

All answers are correct.

How might a parent company's home country eliminate double taxation on foreign source income?

All of the above

Why might a developing country offer a tax holiday?

All of the above

Which of the following statements is true of non-local currency balances in the foreign currency financial statements of foreign operations?

Any loss is reflected in the measurement of consolidated net income.

What is the general rule for international transfer pricing advocated by the Organization for Economic Cooperation and Development (OECD)?

Arm's-length prices

Parentco, Inc. had a negative cumulative translation adjustment of ($250,000) on its balance sheet pertaining to its investment in Subko Ltd at the point in time that Parentco sold its interest in Subko. How must Parentco handle this translation adjustment when it records the sale of Subko?

As a decrease in income (loss on disposal)

What power is given to the Internal Revenue Service (IRS) under code section 482?

Authority to audit international transfer prices

Which of the following methods does U.S. tax law always require to be used in pricing intercompany transfers of tangible property?

Best method.

Under the citizenship approach of tax jurisdiction, if Company A, incorporated in Country X, was based in Country Y and earned dividends in Country Z, the dividends would be ultimately taxed in which country?

Country X

What is the objective in hedging balance sheet exposure?

Creating an equilibrium between foreign currency asset and foreign currency liability balances affected by exchange rates

How is goal congruence achieved in decentralized organizations?

Creating incentives for managers to make decisions that are consistent with corporate goals

How does FASB ASC 830, Foreign Currency Matters define a "highly inflationary economy?"

Cumulative three-year inflation over 100%

When a transfer price is set by the management of a parent company rather than by the subsidiary managers, what kind of transfer price is being used?

Discretionary transfer price

Poole Corporation is a U.S. company with a branch in China. Income earned by the Chinese branch is taxed in both China, at the corporate income tax rate of 25 percent, and the United States, at the rate of 21 percent. What is this an example of?

Double taxation.

How is the international standard for translating foreign currency financial statements (IAS 21) different from U.S. GAAP with respect to subsidiaries in hyperinflationary economies?

IAS 21 requires that the subsidiary's financial statements be restated to account for the inflation before using the current exchange rate for all balance sheet accounts.

Historically, which industry is found most at risk for a transfer pricing adjustment?

Pharmaceuticals

The greatest number of advance pricing agreements have been negotiated with the U.S. Internal Revenue Service (IRS) for which type of intercompany transaction?

Sales of tangible property.

Which one of the following items is normally translated the same way under both the current rate and temporal methods of translation?

Sales revenue.

The definition of a "permanent establishment" is a key article of the OECD's model tax treaty. Which of the following would NOT be considered a permanent establishment by the OECD?

Storage facility

Controlled foreign corporations (CFC) will not be taxed on their foreign income currently if:

Subpart F income is less than 5% of the CFC's total income.

What is the U.S. policy concerning taxing income of a U.S. corporation's foreign subsidiary?

Tax is paid on the foreign subsidiary's income when the profits are returned to the U.S. parent as dividends.

What is a value added tax (VAT)?

Taxes used in lieu of sales tax and incorporated into the price of a product or service.

A Danish subsidiary of a U.S. corporation recorded a building it purchased in 2020 for 100,000,000 krone, when the exchange rate was $0.132/krone. The current exchange rate is $0.163/krone. Under the temporal method, how should the translated amount of the restated asset be interpreted?

The U.S. parent would have had to pay $13,200,000 to acquire the building in 2020.

Kerry is a U.S. citizen residing in Portugal. Kerry receives some investment income from Spain. Why might Kerry be expected to pay taxes on the investment income to the United States?

The United States taxes its citizens on their worldwide income.

While the U.S. has tax treaties with more than 50 countries, it does not have a treaty with Brazil, which is a major recipient of U.S. foreign direct investment. What is the reason for a lack of a U.S. Brazil treaty regarding withholding taxes?

The advantage of a treaty would primarily go to the U.S., so Brazil is not interested in a treaty.

Jordan Inc., a U.S. company, is required to translate into U.S. dollars the foreign currency income generated by its foreign branch. To determine U.S. taxable income, what must Jordan use to translate the net income of its foreign branch into U.S. dollars?

The average exchange rate for the year.

Which of the following best explains how a translation loss arises when the temporal method of translation is used to translate the foreign currency financial statements of a foreign subsidiary?

The foreign subsidiary has more monetary assets than monetary liabilities, and the foreign currency depreciates in value.

Correlative relief is a component of the U.S. Model Income Tax Treaty. What is correlative relief?

When the IRS adjusts an international transfer price, the tax authority in the foreign country makes a corresponding adjustment.

Homeko, Inc. is located in the U.S., but it has subsidiaries in Germany. When the euro appreciates relative to the U.S. dollar, what is the direction of the translation adjustment to consolidate Homeko's financial statements?

When there is net asset exposure, the translation adjustment will be positive.

Worldwide, which type of transfer is most likely to be audited?

Intercompany services

Which one of the following types of intercompany transactions is most likely to be audited?

Intercompany services.

Why might companies have an incentive to finance their foreign operations with as much debt as possible?

Interest payments are generally tax deductible and withholding rates are lower for interests.

If a company is unable to use all its foreign tax credit in a tax year, what happens to the excess?

It is carried back 1 year and forward 10 years.

What is the primary difficulty of using market-based transfer prices for intercompany transactions?

Lack of a well-developed market

In accordance with U.S. generally accepted accounting principles (GAAP), which translation combination would be appropriate for a foreign operation whose functional currency is the U.S. dollar?

Method b. Temporal Treatment of Translation Adjustment •Gain or loss in income statement

In accordance with International Financial Reporting Standards (IFRS), which translation combination would be appropriate for a foreign operation whose Submit functional currency is the currency of the host country (foreign currency)?

Method c. Current rate Treatment of Translation Adjustment Separate component of stockholders' equity

What is meant by the term "thin capitalization?"

Minimizing the amount of equity capital used to fund foreign operations

Subsidiary X, located in a country with a 25% corporate income tax rate, and Subsidiary Y, located in a country with a 35% corporate income tax rate are part of a decentralized organization. They have been engaged in trade with one another using a negotiated transfer price of $50 per unit for sales by Subsidiary X to Subsidiary Y. Pipko, the parent company of both Subsidiary X and Subsidiary Y recently set a discretionary transfer price of $80 per unit for the transfers between X and Y. What is advantage of this decision?

Net income for the corporation as a whole will increase by $3 per unit.

What is one problem in translating retained earnings using either the temporal or current rate method?

Net income is calculated differently, depending upon which method is used.

Zen Energies is a Chinese branch of Super Sigma Inc., incorporated in U.S. In the year ending Dec. 31, 2019, the net income of Zen was 25 million Yuan before tax of 25%. During the year the average exchange rate was 0.16379 Yuan per dollar. The exchange rate on the date of payment of taxes is was 0.16474 Yuan per dollar. Determine the amount of U.S. taxable income.

$4.1007 million

Bush, Inc., has total worldwide income of $500,000. Bush's Polish branch has foreign source income of $200,000 and paid taxes of $38,000 to the Polish government. The U.S. corporate tax rate is 21 percent. What is Bush's overall foreign tax credit limitation?

$42,000

Placo Ltd., a Scottish subsidiary of Limko, Inc., a U.S. company, showed cost of goods sold on its income statement for the year ended December 31, 2010. What amount should be used to consolidate Placo's cost of goods sold into Limko's income statement under the current rate method?

$437,600

The U.S. Internal Revenue Service (IRS) has the authority to impose penalties on companies that significantly underpay taxes as a result of inappropriate transfer pricing. Acme Company transfers a product to a foreign affiliate at $15 per unit, and the IRS determines the correct price should have been $65 per unit. The adjustment results in an increase in U.S. tax liability of $1,250,000. Due to this change in price, what amount of penalty for underpayment of taxes will Acme Company pay?

$500,000.

Babcock Company manufactures fast-baking ovens in the United States at a production cost of $500 per unit and sells them to uncontrolled distributors in the United States and a wholly owned sales subsidiary in Canada. Babcock's U.S. distributors sell the ovens to restaurants at a price of $1,000, and its Canadian subsidiary sells the ovens at a price of $1,100. Other distributors of ovens to restaurants in Canada normally earn a gross profit equal to 25 percent of selling price. Babcock's main competitor in the United States sells fast-baking ovens at an average 50 percent markup on cost. Babcock's Canadian sales subsidiary incurs operating costs, other than cost of goods sold, that average $250 per oven sold. The average operating profit margin earned by Canadian distributors of fast-baking ovens is 5 percent. Which of the following would be an acceptable transfer price under the comparable profits method?

$795

Information for Year 1, Year 2, and Year 3 for the Alpinian branch of Rawl Corporation is presented in the following table. The corporate tax rate in the Alpinian Republic in Year 1 was 11 percent. In Year 2, the Alpinian Republic increased its corporate income tax rate to 15 percent. In Year 3, the Alpinian Republic increased its corporate tax rate to 22 percent. The U.S. corporate tax rate in each year is 21 percent. For Year 1, Year 2, and Year 3, What is the foreign tax credit allowed in the United States?

$8,250, $15,000, and $21,000.

Babcock Company manufactures fast-baking ovens in the United States at a production cost of $500 per unit and sells them to uncontrolled distributors in the United States and a wholly owned sales subsidiary in Canada. Babcock's U.S. distributors sell the ovens to restaurants at a price of $1,000, and its Canadian subsidiary sells the ovens at a price of $1,100. Other distributors of ovens to restaurants in Canada normally earn a gross profit equal to 25 percent of selling price. Babcock's main competitor in the United States sells fast-baking ovens at an average 50 percent markup on cost. Babcock's varded Canadian sales subsidiary incurs operating costs, other than cost of goods sold, that average $250 per oven sold. The average operating profit margin earned by Canadian distributors of fast-baking ovens is 5 percent. raw lill Which of the following would be an acceptable transfer price under the resale price method?

$825

The subsidiary of a U.S. corporation located in Country Y generated income of $1,000,000 on which it paid $400,000 (40%) in taxes to Country Y. The subsidiary paid a dividend to the U.S. parent of $54,000. How much tax is currently owed to the U.S. government if the federal tax rate is 35%?

$O

Information for Year 1, Year 2, and Year 3 for the Alpinian branch of Rawl Corporation is presented in the following table. The corporate tax rate in the Alpinian Republic in Year 1 was 11 percent. In Year 2, the Alpinian Republic increased its corporate income tax rate to 15 percent. In Year 3, the Alpinian Republic increased its corporate tax rate to 22 percent. The U.S. corporate tax rate in each year is 21 percent. For Year 3, what is the net U.S. tax liability?

$O.

High inflationary economies, when considering compounding, have an approximate annual inflation rate of:

26% for three years in a row.

The Internal Revenue Service determined that Covington Ltd. should have been using a transfer price of $400 for the purchase of goods from its U.S. subsidiary but had set the price at $50. What is the rate of penalty that the IRS can impose on the taxpayer?

40% of the amount of taxes underpaid

What are the methods used by the United States to reduce the double taxation of income earned by foreign operations of U.S. companies?

Exempting some foreign source income, allowing a deduction for all foreign taxes paid, and providing a foreign tax credit for foreign income taxes paid.

Aco Ltd mined diamonds at a cost of FC 1,000,000 and sold them to Beako for FC 2,500,000. Beako distributed the diamonds to its customers and received FC 4,000,000. If the national VAT is 20%, how much tax did Beako pay on purchase from Aco Ltd.

FC 300,000

What is the "disappearing plant" problem that is addressed by FASB ASC 830, Foreign Currency Matters?

High inflation can result in extreme decreases in the reported amounts for foreign fixed assets.

Under what condition may it be to the taxpayer's advantage to take a deduction for total foreign taxes paid rather than a tax credit for foreign income taxes?

If foreign taxes other than income taxes are substantial

Which cost will be minimized by setting a low transfer price?

Import duties

Subsidiary X, located in a country with a 25% corporate income tax rate, and Subsidiary Y, located in a country with a 35% corporate income tax rate are part of a decentralized organization. They have been engaged in trade with one another using a negotiated transfer price of $50 per unit for sales by Subsidiary X to Subsidiary Y. Pipko, the parent company of both Subsidiary X and Subsidiary Y recently set a discretionary transfer price of $80 per unit for the transfers between X and Y. How will subsidiary managers in the decentralized organization view this decision by parent company management?

The manager of Subsidiary Y will be concerned about the decline in Subsidiary Y's profit and the effect this will have on his/her bonus.

Under FASB ASC 830, Foreign Currency Matters, what is the definition of "functional currency?"

The primary currency of the foreign entity's operating environment

Under what condition does the IRS consider the resale price method acceptable as a transfer price?

The related party is merely a distributor of finished goods.

In translating the financial statements of a foreign subsidiary into the parent's reporting currency under the current rate method, which of the following statements is true?

The translation adjustment is a function of the foreign subsidiary's net assets.

Under U.S. tax law, what is the basis for the overall foreign tax credit limitation?

To make sure that the foreign tax credit taken by a corporation does not exceed the amount of taxes the foreign affiliate would have paid in the U.S

What is another term for "balance sheet exposure?"

Translation exposure

Of the signals that may cause a taxing authority to audit a company's transfer price, which one is the most important?

Unexpectedly low profit

Non-monetary assets DO NOT include:

accounts receivable.

Withholding taxes on dividends paid by a foreign subsidiary to a parent can be reduced by:

raising prices paid by the subsidiary for goods it acquires from the parent.

International accounting standards define functional currency as:

the currency of the primary economic environment in which the subsidiary operates.