Question

Case 16-13 Determining the Functional Currency of a Foreign Manufacturing Facility
Maxwell Company is a U.S. corporation that uses the U.S. dollar as its reporting currency.
Gonzalez Company is a wholly-owned subsidiary of Maxwell Company located in Mexico,
and functions as a maquiladora facility of Maxwell Company. Consider the following facts
regarding Gonzalez Company:
• Maxwell Company manufactures parts for one of its products at a facility in the United
States. Maxwell Company packages the parts and ships them to Gonzalez Company
for assembly.
• Gonzalez Company has a manufacturing facility in Chihuahua, Mexico. This facility
receives the parts from Maxwell Company. Employees of Gonzalez Company
assemble the parts into the final product and test them to ensure that the quality of the
product is up
to Maxwell Company's standards.
• Gonzalez Company then ships the completed product back to Maxwell Company for
sale to customers.
• The local currency of Gonzalez Company is the Mexican Peso.
• Maxwell Company funds the expenses of Gonzalez Company each month, plus a
small margin.
Required:
Determine the functional currency of Gonzalez Company?

Answer 1

Let us first start by understanding the definition of functional currency.

"The currency in which a corporate entity normally generates and spends cash and in which transactions are normally denominated is called the Functional Currency" Source: Google

Gonzalez Company deals with the following currencies during the lifecycle of manufacturing:

1. Expenses for manufacturing - Maxwell Company funds the expenses each month in USD and charges a small margin
2. Money received from customers - Gonzalez Company just ships the final product to Maxwell and the payments are made in USD
3. Payments to employees - in mexican pesos because it is local currency

Hence, as most of the operations are done though USD, hence the US Dollar is the functional currency.