Chapter 15 Solutions Manual

8/13/2019 Chapter 15 Solutions Manual

1/44

OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL

THINKING CASES

Brief

Exercises Topic Skills

B. Ex. 15.1 Foreign currency translations Analysis

B. Ex. 15.2 Purchases in a foreign currency Analysis, communication

B. Ex. 15.3 Currency strength Analysis

B. Ex. 15.4 Exchange rate fluctuations Analysis, communication

B. Ex. 15.5 Currency choice Analysis, communication

B. Ex. 15.6 Currency strength and gains and losses Analysis, communication

B. Ex. 15.7 Culture effects on business Analysis, judgment

B. Ex. 15.8 Currency fluctuation effects Analysis

B. Ex. 15.9 Exchange rate computation Analysis


15.1 Global business terminology 18 Analysis

15.2 External financial reports and globalization Analysis, research,

technology

15.3 Understanding exchange rate conversion Analysis

15.4 Locating international business

information

Analysis, research,

judgment

15.5 Real World: Airbus, Nikon, Toyota 2, 5 Analysis, communication

Currency fluctuations: who wins and who

loses?

15.6 Foreign currency transaction Analysis

15.7 Harmonization around the world Analysis, research,

technology

15.8 Real World: adidas AGs International

expansion

Analysis, judgment

15.9 Matching foreign exchange gains andlosses

Analysis

15.10 Real World: Global sourcing costs for

Mattel, Inc.

Analysis

4, 5

4, 7

3

5

1, 2

5, 6

4

Objectives

Learning

2, 7, 8

1, 2

4

4

2

Objectives

4

5

5,6

4, 5

4

CHAPTER 15

GLOBAL BUSINESS AND ACCOUNTING

Learning

The McGraw-Hill Companies, Inc., 2010

CH15-Overview


2/44


15.11 Financial statement harmonization 2, 3 Analysis

15.12 Real World: Honda Motor Company 3 Analysis, judgment

Use of U.S. GAAP or IFRS

15.13 Analysis, research,

judgment

Sets A, B Skills

15.1 A,B Exchange rates and export decisions 4, 5, 7 Analysis

15.2 A,B Journalizing exchange rate gains and

losses

1, 46 Analysis, communication

15.3 A,B Exchange rates and income effects 47 Analysis, communication

15.4 A,B Exchange rates and production decisions 4, 7 Analysis

15.5 A,B Understanding trade agreements 2, 7 Analysis, research,

technology

15.6 A,B Comprehensive problem journalizing

exchange rate effects

4

6 Analysis

15.7 A,B FCPA violations 8 Analysis, judgment

15.8 A Real World: adidas AGs globalization 1, 2, 6, 7 Analysis, judgment,

research

15.1 Globalization decisions are complex 1, 2 Analysis, judgment

15.2 Disclosure requirements 2, 3, 5

Analysis, communication,

judgment

15.3 International demand for corporate

governance

2, 3 Analysis, research,

communication

(Ethics, fraud and corporate governance)

Learning

Objectives

Critical Thinking Cases

Comparing environmental factors 2

Problems

Topic


CH15-Overview (p.2)


3/44

DESCRIPTIONS OF PROBLEMS AND CRITICAL THINKING CASES

Problems (Sets A and B)15.1 A,B Cramer Cookie Company/Monster Cookie Company 30 Medium

Demonstrate how differences in costs and exchange rates between

countries can impact the profits earned from exportation. The student

must calculate the forecasted amount of profits to be earned from two

alternative export locations and consider how exchange rate volatility

may impact the decision of which export location to choose.

15.2 A,B Europa-West/Euroam 25 Easy

Prepare journal entries to record payment of liabilities stated in krona.

Involves recognition of both gains and losses from fluctuations in

exchange rates. Student is asked to explain a hedging technique thatwould protect the company from losses from exchange rate fluctuations.

15.3 A,B Wallerton, Inc./Jelton, Inc. 40 Strong

Students investigate the impact of three exchange rate projections on the

income statement. Provides insights into how a strengthening foreign

currency impacts earnings.

15.4 A,B Ulsa Company/Alsu Company 40 Medium

Students calculate profits to be earned in two different production and

selling locations. In addition to differences in production costs, the

student must consider the costs of foreign import duties and income

taxes.

15.5 A,B NAFTA vs. ASEAN Initiative /NAFTA vs. CAFTA DR 90 Strong

This is an unstructured problem that asks students to research an

international trade agreement and compare and contrast its

requirements/restrictions with those of NAFTA. Designed to be a group

writing assignment or presentation exercise.

15.6 A,B Wolfe Computer/Fox Games 40 Strong

A more comprehensive problem involving gains and losses on bothreceivables and payables stated in foreign currencies. Student is also

asked to explain techniques for hedging against losses on foreign

payments and foreign receivables.

Below are brief descriptions of each problem and case. These descriptions are accompanied by the

estimated time (in minutes) required for completion and by a difficulty rating. The time estimates

assume use of the partially filled-in working papers.


Description Problems


4/44

15.7 A,B FCPA Violations 30 Medium

Students are asked to assess four business activities for violation of the

FCPA. They also consider whether the activities are good business

practices and if alternative activities should be considered.

15.8 A Home Depot's Globalization 40 Medium

This problem demonstrates how the financial statements of a companycan be used to assess its level of globalization. By evaluating the

number of countries with operations; the percentage of sales and assets

from foreign sources; and the foreign taxes paid, an investor can form

an opinion about a firms level of globalization.


Description Problems (p.2)


5/44

Critical Thinking Cases

Bristow Limited 40 Medium

Presents several options a firm has for increasing its presence in a

foreign location. The student considers what factors are useful in

deciding the option most beneficial to the firm. Also demonstrates that

different options result in different informational needs.

International Accounting Standards 50 Medium

Given a set of arguments for and against harmonization of international

accounting practices, the student is asked to write a one-page summary

of his/her opinions regarding the issue.

Inside Japan 70 Strong

Business Week

Students will think and write about how environmental variables affect

the accounting profession in Japan. In addition, students practice

writing and group skills by assessing whether Japanese accounting

standards are becoming more like U.S. standards.

International Demand for Corporate Governance 30 Medium

Ethics, Fraud & Corporate Governance

Using the OECD Web site, students are asked to write a short paper

about global efforts to create corporate governance.

15.4

15.1

15.2

15.3


Desc. of Cases


6/44

SUGGESTED ANSWERS TO DISCUSSION QUESTIONS

1.

2.

3. a.

b.

c.

4 .

5.

6. a.

Political risk related to unstable governments

Changes in regulation or law

Changes in taxes, tariffs and fees

Different reporting requirement across borders.

b.

Determine the amount of information available to investors

Can be a planned economy (government controlled)

Are sometimes industrial organizations, such as the South Korean chaebol

Germany's goals are often very short-term, especially in comparison to the Japanese, who

place a great amount of reliance on long-term relationships and tradition.

The Japanese tend to be more risk-adverse and feel quite uncomfortable with uncertainty and

ambiguity, whereas Germans tend to be more at ease with uncertainty.

Economic systems affect accounting practices because they:

Different accounting standards have been developed in various countries because of differences

in:

The International Accounting Standards Board (IASB) was formed by the major accounting

organizations of several countries to develop and promote uniform international accounting

standards. The board has been unable to obtain global application of its standards because it has

no global enforcement power.

Sweden is an mildly individualistic country. Brazil is a very collectivist society, thus placing

more importance on building close relationships and ensuring the success of others. Brazil scores

higher on long-term orientation. The Brazilian society places greater emphasis on maintaining

tradition and long-term relationships. Brazil scored higher on power distance compared to the

Sweden. In Brazil, it is not believed that all people are created equal. Social status plays a key

role in the amount of power for an individual in Brazil.

The economic system that a company has been operating under determines the type ofaccounting information collected by the company. Internal accounting information is critical in

the valuation of a company. If there are no standards to establish accounting information, then

there is no information that can be used in understanding and evaluating the future success of a

company and the potential benefits of doing business internationally are highly uncertain.

Political and legal systems can affect accounting practices because of:

Legal and political systems

Economic environments

Levels of stability of the currency

Japan is a collectivist society, meaning that it places a greater emphasis on interdependence

than Germany, who tend to be very individualistic.


Q1-6


7/44

c.

Peoples perceptions of economic situations differ in different societies

Marketing and advertising must be adapted for different cultures

Differing mindsets across borders, such as individualistic vs. collectivist societies or

large vs. small power distance.

d.

Without technology, communication between different groups is very difficult Lack of significant infrastructure poses potential problems for international transactions,

such as limited communication and unreliable power.

7

8

(1)

(2)

9

10

The globalization of business is a process whereby managers begin to incorporate the impact ofinternational events and activities into their strategic planning. At the most basic level, domestic

managers become aware that changes in foreign exchange rates, international technological

advances, cultural diversity or international political and economic issues will have an impact

on their ability to compete in the future. At higher levels of globalization, firms may become

multinational enterprises that produce and sell products in multiple countries.

A firms level of globalization determines what types of decisions and strategies it must

consider to compete effectively. Management accountants must understand the firms level of

globalization in order to know what types of international information is needed to aid in the

firms decision making process.

Culture affects accounting practices because:

Technology and infrastructure affect accounting practices because:

Two ways that a company making purchases on account from foreign companies can protect

itself against the risk of losses from increases in the exchange rate are:

In some other countries, it is not explicitly illegal to engage in bribery of foreign officials. As a

result, some U.S. companies maintain that they are at a disadvantage in obtaining business whenthey compete with companies located in countries without a prohibition against such bribes.

Specify the purchase prices in U.S. dollars.

Hedge the position of foreign currency indebtedness by acquiring an offsetting position in

foreign currency future contracts. Then, any loss resulting from an increase in the foreign

exchange rate will be offset by a gain in the value of the future contracts.


Q7-11


8/44


Q7-11


9/44

11.

12.

13.

14.

15.

16.

17.

18.

The French furniture maker bears the (transaction) risk of exchange rate gains and losses since

it must obtain Singapore dollars.

A foreign trade zone is a location in the U.S. where goods can be imported duty free until they

are shipped out of the zone. An advantage to operating in a foreign trade zone is that a firm can

maintain working capital until later in the production process. For example, firms that import

raw materials from a foreign country do not have to pay duty on it until the finished good is

shipped out of the zone.

The weakening of the U.S. dollar relative to the euro means that $1 can purchase (or be

exchanged for) relatively fewer euros. Likewise, to obtain a given amount of euros will require

more U.S. dollars after the weakening. All else equal, a U.S. customer with a fixed amount of

dollars to spend will be able to purchase fewer euros, which will lower the quantity of Italian

goods that can be acquired. Thus, the overall quantity of Italian goods sold in the U.S. will

likely decline.

Current IASB members are: Sir David Tweedie (U.K.), Thomas Jones (U.K.), Mary Barth

(U.S.), Hans-Georg Bruns (Germany), Anthony Cope (U.S.), Robert Garnett (South Africa),

Gilbert Ge'lard (France), John T. Smith (U.S.), James Leisenring (U.S.), Warren McGregor

(Australia), Tricia OMalley (Canada), Jay Engstrom (Sweden), Geoffrey Wittington (U.K.),

and Tatsumi Yamada (Japan). Brazil's market is emerging and lacks expertise in accounting

standard setting.

In an international licensing agreement, a domestic firm contractually agrees to allow a foreign

firm to use its trademarks, patents, technology, designs, or processes, usually in exchange for a

fee. An international joint venture is a company that is owned by two or more firms from

different countries.

To maintain the highest level of control over production processes and quality, a firm could

choose to simply export its domestically produced goods or establish a wholly-owned

subsidiary in the target country.

Societies described as individualistic tend to place relatively more importance on individual

achievement, accountability, and welfare. Collectivist societies tend to focus on group outcomes

and welfare. Financial reports in collectivist societies tend to include disclosures related to

societal issues. For example, France requires a social balance sheet detailing pay structure,

health and safety conditions, hours worked.

High power distance societies generally accept greater differences in authority and

responsibility across institutional levels. Low power distance societies expect more liberal

distribution of power across organizational levels. Firms operating in high power distance

countries tend to have fewer hierarchical levels with large power differences between them.

Firms in low power distance countries tend to have more levels with less power differences

between them.


Q12-19


10/44

19. Hedging is the practice of minimizing or eliminating the risk of loss associated with foreign

currency fluctuations. Natural hedging occurs when a firm holds similar amounts of receivables

and payables denominated in the same foreign currency. In this way, any gains and losses from

exchange rate fluctuations will cancel each other out.


Q20


11/44

SOLUTIONS TO BRIEF EXERCISES

B. Ex.15.1 a.

b.

c.

B. Ex.15.2 a.

b.

B. Ex.15.3

B. Ex.15.4 a.

b.

c.

Increasing exchange rates will cause losses for a company that makes credit

purchases in prices stated in a foreign currency. As the exchange rate rises,

the company will have to spend more and more singapore dollars in order to

purchase the foreign currency needed to pay off its foreign accounts payable.

A company that sets its sales prices in Singapore dollars will not have

receivables affected by fluctuations in foreign exchange rates. These

fluctuations will affect the amounts of foreign currency that the companysforeign customers must pay for their purchases, but they will not affect the

number of dollars that the Singaporean company receives. However, an

increase in foreign exchange rates may cause a Singaporean companys sales

to rise as Singapore prices may become cheaper to foreign buyers.

Increasing exchange rates will create gains for a company that makes credit

sales at prices set in a foreign currency. As the exchange rates rise, thecompanys foreign accounts receivable will become equivalent to an

increasing number of Singapore dollars.

$1,394,000 = (800,000 $1.7425 per British pound)

The Malaysian company will determine the dollar cost of this purchase bytranslating 2 million pounds into the equivalent value in Malaysian Ringgit.

This is done by multiplying the foreign currency amount by the foreign

exchange rate, stated in Malaysian Ringgit, in effect at the date of the

transaction.

The conversion of one currency to another is handled by banks in an

international currency exchange. The Malaysian company can pay the debt in

ringgit through its bank. The bank will use these ringgit to purchase the

needed foreign currency (pounds) and will arrange delivery of this currency

to the foreign companys bank.

No. Although the exchange rate for the British pound is much higher than for the

yen, this fact does not necessarily mean that the pound is the stronger currency.

The higher rate merely indicates the relative size of the basic unit of the currency.

A pound is a relatively large denomination, whereas the yen is relatively small.

The strength of a currency is determined by the directionin which the exchange

rate has been moving recently. Over the last several decades, the exchange rate

for the pound has been falling, but the exchange rate for the yen has been rising.

Thus, over this time period, the yen has been a stronger currency than the

pound.

$2,674 = (350,000 $.00764 per yen)

$73,790 = (50,000 $1.4758 per euro)


BE15.1,2,3,4,5


12/44

B. Ex.15.5

B. Ex.15.6

B. Ex.15.7

B. Ex.15.8

B. Ex.15.9

The purchasing agent should prefer to buy at prices stated in Mexican pesos. If

the exchange rate for the peso falls while the company has accounts payable (in

pesos) to its Mexican suppliers, the company will be able to repay these debts

with a smaller number of H.K. dollars, thus experiencing gains from the

exchange rate fluctuations.

Students will need to consult an exchange converter on the internet, either

www.x-rates.com or www.currency-exchange-rate.com.

Hutchison should experience primarily gains as a result of the strong H.K.

dollar. The phrase the H.K. dollar has risen against most foreign currencies is

equivalent to saying that most foreign exchange rates have fallen when stated in

H.K. dollars. As Hutchison has accounts payable in foreign currencies, it will

experience gains from declines in foreign exchange rates.

One example of cultural differences provided on the website is between the

Middle Eastern countries and the Western countries, especially the United

States. When negotiating in Western countries, the objective is to work toward

a target of mutual understanding and agreement and shake-handswhen that

agreement is reacheda cultural signal of the end of negotiations and the start

of working together. In Middle Eastern countries much negotiation takesplace leading into the agreement, signified by shaking hands. However, the

deal is not complete in the Middle Eastern culture. In fact, it is a cultural sign

that 'serious' negotiations are just beginning. Imagine the problems this creates

when each party in a negotiation is operating under diametrically opposed

rules and conventions.This is just one example why it is critical to

understand other cultures you may be doing business withwhether on a

vacation in a foreign country, or negotiating a multi-million dollar deal for your

company.

The Mexican peso decreased in dollar value, so that Bell corporation was able to

pay back the payable with pesos that were worth fewer dollars. The Britishpound increased in dollar value so that Bell Corporation received pounds that

were worth more dollars than when the receivable in pounds was recorded.


BE15.6,7,8,9,10


13/44

Ex. 15.1

Ex. 15.2

Ex. 15.3

Ex. 15.4 The World Fact Book can be located at:

https://www.cia.gov

a. Indonesias primary imports and exports are manufactured goods,

followed by fuels (exports) and raw materials (imports).

b. The labor force numbers approximately 109.9 million with a highpercentage being literate (over 80%). Most of the labor force is engaged in

agricultural occupations (43%); 18% in industry and 39% in services.

c. Communication and transportation networks are adequate, but not as

extensive as in a fully developed country.

d. The government has been trying to encourage free market efforts by

following a policy of continued deregulation

e. Firms considering locating there must take into account the possibility of

political unrest.

c. $3,000 = 23,640.30 South African rand

d. 150 euros = 241.59 Swiss francs

The answers to this exercise will vary greatly depending on the firm chosen

for study. Most of the data required can be obtained by carefully reading

the firms annual report(s) or locating articles concerning the firm

contained in business periodicals or newspapers.

The following answers are provided using exchange rates from August

2008. Student responses will vary depending on current exchange rates.

a. 15,000 euros = $22,042.50b. 7,000 Brazilian reals = $4,278.47,047.72

a. None (this describes an exchange rate)

b. Exporting

c. International licensing

f. International Accounting Standards Board

d. Hedginge. None (this describes a market economy)


E.1,2,3,4
https://www.cia.gov/https://www.cia.gov/


14/44

Ex. 15.5 a.

b.

c.

d.

e.

f.

Ex. 15.6

Currency Used Exchange Effect

in Contract Rate Direction on Income

Case 2 3 4

a Foreign currency Falling Loss

b U.S. dollars Rising No effectc Foreign currency Rising Loss

d U.S. dollars Falling No effect

e Foreign currency Falling Gain

Ex. 15.7 a.

b.

Answers are in italics:

Column

Again, there are many countries that do not allow only IFRS financial reports.

Examples are U.S., China, Russia, and Bolivia.

Weak euro. Companies that export Europe-made products benefit from a weak

dollar, because the higher foreign exchange rates make European goods less

expensive for foreign customers.

Strong euro. A strong dollar means low foreign exchange rates, which, in turn,

make foreign goods less expensive for European customers.

Strong euro. A strong euro (low foreign exchange rates) makes foreign-made

goods less expensive to European consumers. Therefore, Japanese imports suchas Toyotas are more competitive with European products when the euro is

strong.

Weak euro. A weak euro (high foreign exchange rates) makes European

products less expensive to customers who buy these products using a foreign

currency. Therefore, European products such as MAN SE trucks will sell better

in foreign countries when the euro is weak.

Strong euro. A strong euro allows European tourists traveling abroad to buy

more foreign currency and, therefore, more goods and services in foreign

countries.

Weak euro. Even though this small store has no receivables or payables stated

in foreign currency, it still competes with stores selling foreign-made products.

A weak euro raises the price of foreign goods to European consumers,

thereby making the foreign goods less competitive with Europe-made products.

There are many countries listed on the website from which students can choose.

Some examples are Hong Kong, Singapore, and Malaysia.

Type of Credit

Purchases

Sales

Purchases

Transaction

1

Sales

Purchases


E.5,6,7


15/44

Ex. 15.8 a.

b.

Ex. 15.9

Matching

Transaction Letter

Foreign Currency

Effect

Foreign Exchange

Gain or Loss

a. b Appreciates Loss

b. a Appreciates Gain

c. d Depreciates Gain

d. c Depreciates Loss

Import Purchase

Foreign Currency

Receivable

Payable in Foreign

Currency

The note of goodwill indicates that adidas AG operates in Greater China,

Western Europe, Asia and other countries.

adidas AG needs to comply with legal requirements and consider political risks in

each country. Culture will be important in determining what to sell in each

country. Each countrys available infrastructure will determine where to open

new stores. Finally, the economic environment will affect where new stores will

be opened.

Transaction

Export Sale


E.8,9,10,11


16/44

Ex. 15.10 Answers will vary depending on the current exchange rates.

Ex. 15.11 a.

b.

c.

Ex. 15.12

Ex. 15.13 China differs from the U.S. on many environmental factors. First, the U.S. has a

market economy and China has a planned economy, although it is moving toward a

market economy. In China, the culture tends to be low on individualism, high on

uncertainty avoidance and high on power distance. The Chinese communist partycontrols the political-legal system in China. Finally, the Chinese infrastructure is

being modernized, but still lags the U.S. in terms of transportation, education, and

technology availability. Accounting practice in China are only recently being

developed to support an active capital market. Because China is a planned

economy, management accounting practices have not focused on ensuring that

companies are profitable. Finally, tax accounting in China is still in its infancy.

The adjustments to U.S. GAAP were related to revaluations of fixed assets.

Revaluations are acceptable under U.K. GAAP, but not under U.S. GAAP

where historical costs are required. Thus, profit increases because the

revaluations have increased the depreciation expense under U.K. GAAP and

thus reduced profit. So to adjust to U.S. GAAP profit the depreciation

associated with revaluation must be added back to increase the profit.

The additions to shareholders equity are associated with the total accumulated

depreciation for revaluations, over all the years that revaluations have taken

place.

The deduction to shareholdersequity is to reverse the revaluations of the fixed

assets.

Honda Motor Company might choose to report their financial results using IFRS

because they operate in several countries around the world and thus are interested

in raising capital in many locations throughout the world. IFRS is accepted in morecountries than U.S. GAAP. However, the U.S. capital market is the largest capital

market in the world and thus access to that market is critical. If Honda uses IFRS,

they will have to reconcile their statements to U.S. GAAP in order to access U.S.

capital markets. Although U.S. GAAP is widely accepted in other capital markets,

more and more pressure is being put on the U.S. to converge to IFRS so that they

will be compatible.


E.12,13,14,15


17/44

SOLUTIONS TO PROBLEMS SET A

30 Minutes, Medium PROBLEM 15.1ACRAMER COOKIE COMPANY

a.

kr 35,360

(8,500)

(20,400)

(2,720)

kr 3,740*1 0.147

b.

kr 31,808

(8,500) (13,600)

(5,453)

kr 4,255

*1 0.088

c.

Profit if sold in the U.S.:

Profit in kroner

Profit if sold in Great Britain:

Total sales revenue in Danish kroner ($5,200 6.80 kroner/dollar*)

Materials and labor costs

Shipping costs in kroner ($3,000 6.80 kroner/dollar)

Misc. costs in kroner ($400 6.80 kroner/dollar)

Total sales revenue in Danish kroner (2,800 pounds 11.36 kroner/pound*)

Large fluctuations in exchange rates can affect the level of realized profits. Although the

original estimates show a higher level of profits are expected from exporting to Great Britain,

a substantial strengthening of the krone relative to the pound could result in significantly

lower profits. The risk of lower profits from Great Britain may make exporting to the U.S.

more attractive.

Materials and labor costsShipping costs in kroner ($2,000 6.80 kroner/dollar)

Misc. costs in kroner (480 pounds 11.36 kroner/pound)

Profit in kroner


P15.1A


18/44

25 Minutes, Easy PRO

EU

a.

Nov 12 Inventory AUD 2,549,000Accounts Payable (Stockholm Motors)

To record purchase of automobiles from Stockholm

Motors for sk20,000,000 when exchange

rate is AUD.12745

per krona (sk20,000,000 AUD.12745 = $2,549,000).

Dec 31 Loss on Fluctuations in Foreign Exchange Rates AUD 25,800Accounts Payable (Stockholm Motors)

To adjust balance of sk20,000,000 account payable

to amount indicated by year-end exchange rate:

Original account balance AUD 2,549,000Adjusted balance

(sk20,000,000 AUD.12874) 2,574,800Required (AUD 25,800.00)

Jan 11 Accounts Payable (Stockholm Motors) AUD 2,574,800Cash

Gain on Fluctuations in Foreign Exchange Rates

To record payment of sk20,000,000 account

to Stockholm

Motors and to recognize gain from fall in

exchange rate since Dec. 31:

Account payable, adjusted balance AUD 2,574,800Amount paid, Jan. 11 2,566,800Gain from decline in exchange rate AUD 8,000

b.

c.

General Journal

Computation of exchange rate on Jan. 11:

Amount paid, AUD2,566,800, divided by liability in Swedish kronor, sk20,000,000 = exc

AUD.12834 per krona.

On November 12, Europa-West could have purchased 60-day future contracts on 20 mil

future contracts would have created a krona receivable of the same size as the company

Stockholm Motors. Any gain or loss on the payable as a result of exchange rate fluctuatihave been offset by a corresponding loss or gain on the future contracts.


P15.2A


19/44

BLEM 15.2A

OPA-WEST

AUD 2,549,000

AUD 25,800

AUD 2,566,800AUD 8,000

ange rate,

ion kronor. These

s krona payable to

ns would then


P15.2A


20/44

40 Minutes, Strong

WALLERTON, INC.

a. Complete the following ProForma Income Statements:

C$ = $.75 C$ = $.80 C$ = $.85

Sales:(1) U.S. $300.00 $304.00 $307.00

(2) Canadian 3.00 3.20 3.40

(3) Total 303.00 307.20 310.40

Cost of Goods Sold:

(4) U.S. 50.00 50.00 50.00

(5) Canadian 150.00 160.00 170.00

(6) Total 200.00 210.00 220.00

(7) Gross Profit $103.00 $97.20 $90.40

Operating Expenses:

(8) U.S. Fixed 30.00 30.00 30.00

(9) U.S. Variable

10% of Sales 30.30 30.72 31.04

(10) Total 60.30 60.72 61.04

(11) Operating

Earnings $42.70 $36.48 $29.36

Interest Expenses:

(12) U.S. 3.00 3.00 3.00(13) Canadian 7.50 8.00 8.50

(14) Total 10.50 11.00 11.50

Earnings before Tax $32.20 $25.48 $17.86

b. Wallerton expects more foreign costs (Canadian Cost of Goods Sold = $150) than it expects

in foreign revenues (Canadian Sales = $3.00). Therefore, Wallertons Earnings Before Tax is

negatively affected by the stronger foreign currency. Thus, its earnings decline as the U.S.

Dollar purchases fewer and fewer Canadian dollars (i.e., as the Canadian Dollar gets

stronger).

PROBLEM 15.3A


P.15.3A


21/44

40 Minutes, Medium

T

a.

Sales revenue per unit 645.00 Ringgits

Cost of components (215.00)

Import duties (.05 215; .15 20) (10.75)Assembly costs (200.00)

Pretax profit per unit 219.25

Income tax per unit (20%; 10%) (43.85)

Profit per unit 175.40 Ringgits

b. Profit per unit in Singapore dollars

(175.40 ringgits .465 singapore dollars/ringgit;

19.80 liri 5 singapore dollars/lira) SGD 81.56

The highest profits per unit will be earned by

assembling and selling product Y in Malta.

c. Total profit in singapore dollars

($81.56 12,000 units; $99 8,000 units) SGD 4,978,720

On a total profit basis, the highest total profits will be

earned by assembling and selling product Y in

Malaysia.

Malaysia


P.15.4A


22/44

PROBLEM 15.4AE ULSA COMPANY

70.00 Liri

(20.00)

(3.00)(25.00)

22.00

(2.20)

19.80 Liri

SGD 99

SGD 792,000

Malta


P.15.4A


23/44

90 Minutes, Strong PROBLEM 15.5AGLOBAL TRADE AGREEMENTS

Answers to the assignment will vary depending on what differences are highlighted. For example

the countries that have signed the agreements differ as well as the stipulations about what

goods are covered, how disputes are resolved, and how the accounting for costs and tariffs aredetermined. Trade agreements allow goods to flow more freely across borders at lower costs

(lower tariffs) while simultaneously encouraging investment in the countries involved in the

agreements. Trade agreements can allow a business to access markets that were previously

unreachable, can expedite technology transfer between countries and create jobs in the

countries that are party to the agreement. The ASEAN countries are Brunei, Cambodia,

Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. One

important difference between NAFTA and the ASEAN Initiative is that NAFTA's focus is on the

economic benefit all parties to the agreement will receive, but the ASEAN agreement has

significant political objectives. ASEAN is designed to strengthen integration of these countries

and create a set of bilateral Free Trade Agreements between the U.S.

and each of these countries.


P.15.5A


24/44

40 Minutes, Strong PRO

WOLFE

a.

Oct 28 Inventory of Raw Materials AUD 1,890,000Accounts Payable (Mitsutonka)

To record purchase of 20,000 disk drives from

Mitsutonka for 180,000,000 due in 30 days. Exchange

rate, AUD.0105 (180,000,000 AUD.0105 = AUD1,890,000).

Nov 9 Accounts Receivable (Bank of England) AUD 997,425

Cost of Goods Sold AUD 518,000

Inventory of Finished Goods

Sales

To record sale of 700 computers to Bank of England

for 604,500, due in 30 days. Exchange rate AUD1.65

(604,500 AUD1.65 = AUD997,425).

27 Accounts Payable (Mitsutonka) AUD 1,890,000


Cash

To record payment of 180,000,000 liability to Mitsutonka

and to recognize gain from decline in exchange rate:

Original account balance AUD 1,890,000

Amount paid 1,836,000

Gain from decline in exchange rate AUD 54,000

Dec 2 Inventory of Raw Materials AUD 843,600

Accounts Payable (German Optical)

To record purchase of 10,000 monitors from German

Optical for 1,200,000, due in 60 days. Exchange

rate, AUD.7030 (1,200,000 AUD.7030 = AUD843,600).

9 Cash AUD 985,335

Loss on Fluctuations in Foreign Exchange Rates AUD 12,090

Accounts Receivable (Bank of England)

Collected 604,500 receivable from Bank of England

when exchange rate was AUD1.63 per British pound:

Original receivable AUD 997,425

Amount collected (604,500 AUD1.63) 985,335

Loss from fall in exchange rate AUD 12,090

11 Accounts Receivable (Computique) AUD 14,250,000Cost of Goods Sold AUD 7,400,000

Inventory of Finished Goods

Sales

To record sale of 10,000 computers to Computique for

SFr23,750,000, due in 30 days. Exchange rate AUD.6000

per franc (SFr23,750,000 AUD.6000 = AUD14,250,000).

General Journal


P.15.6A


25/44

LEM 15.6A

OMPUTER

AUD 1,890,000

AUD 518,000

AUD 997,425

AUD 54,000

AUD 1,836,000

AUD 843,600

AUD 997,425

AUD 7,400,000

AUD 14,250,000


P.15.6A


26/44

PRO

WOLFE COMPUTER

b.

Dec 31 Accounts Payable (German Optical) AUD 3,600Gain on Fluctuations in Foreign Exchange Rates

To adjust balance of 1,200,000 liability to German

Optical to amount indicated by year-end exchange rate:

Original account balance AUD 843,600

Adjusted balance (1,200,000 AUD.7000) 840,000

Required adjustment (gain) AUD 3,600

Dec 31 Loss on Fluctuations in Foreign Exchange Rates AUD 47,500

Accounts Receivable (Computique)

To adjust balance of SFr23,750,000 receivable from

Computique to amount indicated by year-end exchange rate:

Original AUD 14,250,000

Adjusted balance (SFr23,750,000

AUD.5980) 14,202,500

Required adjustment (loss) AUD 47,500

c. Computation of unit sales price:

Sales price, 700 units, in British pounds

Sales price, 700 units, in Australian dollars

(604,500 AUD1.65 per pound)

Sales price per unit (AUD997,425 700 units)

Alternative computation, using sale in francs:

Sales price, 10,000 units, in Swiss francs

Sales price in Australian dollars (SFr23,750,000

AUD.6000 per franc)

Sales price per unit (AUD14,250,000 10,000 units)

d. Computation of exchange rate for yen on Nov. 27:

Amount paid, AUD1,836,000, divided by liability in yen,

180,000,000, equals exchange rate, AUD.0102 per yen.

General Journal

Adjusting Entries


P.15.6A (p.2)


27/44

BLEM 15.6A

(continued)

AUD 3,600

AUD 47,500

604,500

AUD 997,425AUD 1,425

SFr23,750,000

AUD 14,250,000

AUD 1,425


P.15.6A (p.2)


28/44

PROBLEM 15.6A

WOLFE COMPUTER (concluded)

e. (1)

(2)

Wolfe Computers could have hedged its position in foreign accounts payable by

purchasing an equivalent amount of future contracts in these currencies, maturing at

the same time as the liabilities must be paid. These contracts are essentially receivables

in foreign contracts. Any gains or losses on the foreign payables would then be offsetby a counterbalancing loss or gain on the future contract.

Wolfes position in its foreign receivables (payables) could be hedged by selling

(buying) future contracts in those currencies. From the viewpoint of the seller (or

buyer) of a future contract, the contract is a liability to pay (receive) a fixed amount of

foreign currency at a future date. Thus, Wolfe would be creating foreign payables

(receivables) to offset its foreign receivables (payables).


P.15.6A (p.3)


29/44

30 Minutes, Medium PROBLEM 15.7AFCPA VIOLATIONS

Under the amended Foreign Corrupt Practices Act, only activity cwould be considered illegal

since it is intended to help the firm garner business it may not otherwise obtain. Activities a,b

and dwould be considered facilitating payments as these are intended to speed up the

provision of government services (aand d) or result in a higher level of services (b). From anoperations standpoint, all items (athrough d) could be considered bad management practices.

These practices encourage a climate that expects extra payments to complete a job that should

be paid for by the government. Company A should work with government officials to prevent

government workers from accepting facilitating payments. In addition, company A could

encourage the government to pay workers a living-wage so that facilitating payments would

not be necessary to maintain an adequate standard of living.


P.15.7A


30/44

40 Minutes, Medium

ADIDAS A

a.

b.

c.

d.

adidas AG operates in Greater China, Western Europe, Asia an

adidas AG is a multinational company and its cash-generating

China, Western Europe, Asia and other countries.

Assets and liabilities of adidas AGs non-euro functional curren

into the reporting currency, the euro, which is also the functi

closing exchange rates at the balance sheet date.

The note of adidas AG suggests that adidas AG uses derivative

currency options, forward contracts as well as interest rate swa

rate swaps, to hedge its exposure to foreign exchange and intere


P.15.8A


31/44

PROBLEM 15.8A S GLOBALIZATION

d other countries.

nits are located in Greater

cy subsidiaries are translated

nal currency of adidas AG, at

inancial instruments, such as

ps and cross-currency interest

st rate risks.


P.15.8A


32/44

SOLUTIONS TO PROBLEMS SET B

30 Minutes, Medium PROBLEM 15.1BMONSTER COOKIE COMPANY

a.

kr 37,500

(9,000)

(17,500)

(2,625)

kr 8,375

b.kr 28,886

(9,000)

(11,875)

(5,555)

kr 2,456

c.

Profit if sold in Great Britain:Total sales revenue in Danish kroner (2,600 pounds 11.11 kroner/pound*)

*1 .16

Profit if sold in the U.S.:

Total sales revenue in Danish kroner ($6,000 6.25 kroner/dollar*)



Misc. costs in kroner ($420 6.25 kroner/dollar)

Profit in kroner

*1 .09

Large fluctuations in exchange rates can affect the level of realized profits. However, the

estimates in parts a. and b. show a higher level of profits are expected from exporting to the

U.S. In addition, substantial fluctuations of the krone relative to the pound add addtional

uncertainties. Without some analysis of the likely direction of the fluctuations, shipping to the

U.S. appears to be the correct decision.



Misc. costs in kroner (500 pounds 11.11 kroner/pound)

Profit in kroner


P.15.1B


33/44

25 Minutes, Easy PROBL

a.

Dec 1 Inventory 3,000,000

Accounts Payable (WMB Motors)To record purchase of automobiles from WMB

Motors for SFr4,000,000 when exchange rate is AUD.75

per mark (SFr4,000,000 x AUD.75 = AUD3,000,000).

Dec 31 Loss on Fluctuations in Foreign Exchange Rates 120,000

Accounts Payable (WMB Motors)

To adjust balance of SFr4,000,000 account payable

to amount indicated by year-end exchange rate:

Original account balance AUD 3,000,000

Adjusted balance (SFr4,000,000 x AUD.78) 3,120,000

Required adjustment (loss) (AUD 120,000)

Jan 15 Accounts Payable (WMB Motors) 3,120,000

Cash


To record payment of SFr4,000,000 account to WMB

Motors and to recognize gain from fall in

exchange rate since Dec. 31:

Account payable, adjusted balance AUD 3,120,000

Amount paid, Jan. 15 3,080,000

Gain from decline in exchange rate AUD 40,000

b.

c.

General Journal

Computation of exchange rate on Jan. 15:

Amount paid, AUD3,080,000, divided by liability in Swiss francs SFr4,000,000 = exchange rat

Swiss franc.

On December 1, Euroam could have purchased 45-day future contracts on 4 million Swiss fra

future contracts would have created a Swiss franc receivable of the same size as the company'

payable to WMB. Any gain or loss to the payable as a result of exchange rate fluctuations wou

offset by a corresponding loss or gain on the future contracts.


P.15.2B


34/44

M 15.2B

EUROAM

3,000,000

120,000

3,080,000

40,000

, AUD0.77 per

cs. These

Swiss franc

d have been


P.15.2B


35/44

40 Minutes, Strong

JELTON, INC.

a.

C$ = $.70 C$ = $.80 C$ = $.90

$395.00 $400.00 $405.00

3.50 4.00 4.50

398.50 404.00 409.50

100.00 100.00 100.00

70.00 80.00 90.00

170.00 180.00 190.00

$228.50 $224.00 $219.50

30.00 30.00 30.00

39.85 40.40 40.95

69.85 70.40 70.95

$158.65 $153.60 $148.55

5.00 5.00 5.00

7.00 8.00 9.00

12.00 13.00 14.00

$146.65 $140.60 $134.55

b.

10% of Sales

(10) Total

(14) Total

Earnings before Tax

Interest Expenses:

(12) U.S.

(13) Canadian

(11) Operating

Earnings

(5) Canadian

(6) Total

(7) Gross Profit

Operating Expenses:

(8) U.S. Fixed

(9) U.S. Variable

PROBLEM 15.3B

Jelton expects more foreign costs than it expects in foreign revenues. Therefore, Jelton's

Earnings Before Tax is negatively affected by the stronger foreign currency. Thus, its

earnings decline as the U.S. Dollar purchases fewer and fewer Canadian dollars (i.e. as the

Canadian Dollar gets stronger).

Sales:

(1) U.S.

(2) Canadian

(3) Total

Cost of Goods Sold:

(4) U.S.


P.15.3B


36/44

40 Minutes, Medium

a.

Sales revenue per unit 700.00 Ringgits

Cost of components (200.00)

Import duties (.04 200; .12 18) (8.00)

Assembly costs (250.00)

Pretax profit per unit 242.00

Income tax per unit (25%; 12%) (60.50)

Profit per unit 181.50 Ringgits

b. Profit per unit in dollars

(181.50 ringgits .44 singapore dollars/ringgits;

21.86 liri 5 singarpore dollars/lira) $79.86

The highest profits per unit will be earned byassembling and selling product X in Malta.

c. Total profit in dollars

(S$79.86 14,000 units; S$109.3 10,000 units) S$1,118,040

On a total profit basis, the highest total profits will be

earned by assembling and selling product X in

Malaysia.

Malaysia


P.15.4B


37/44

PROBLEM 15.4BUlsa Company

75.00 Liri

(18.00)

(2.16)

(30.00)

24.84

(2.98)

21.86 Liri

$109.30

S$1,093,000

Malta


P.15.4B


38/44

90 Minutes, Strong PROBLEM 15.5BNAFTA vs CET

Answers to the assignment will vary depending on what differences are highlighted. For

example the countries that have signed the agreements differ as well as the stipulations about

what goods are covered, how disputes are resolved, and how the accounting for costs and tariffs

are determined. Trade agreements allow goods to flow more freely across borders at lower costs(lower tariffs) while simultaneously encouraging investment in the countries involved in the

agreements. Trade agreements can allow a businessproducts to access markets that were

previously unreachable, can expedite technology transfer between countries and create jobs in

the countries that are party to the agreement. The South American countries that have signed

the initiative are Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras,

Nicaragua, and the United States (CAFTA-DR). The agreement contains provisions that require

the countries to improve labor laws and their enforcement, install anti-corruption legislation

and increase transparency. While the CAFTA-DR is still being developed, NAFTA is a mature

economically sound agreement between the U.S., Canada, and Mexico.


P.15.5B


39/44

40 Minutes, Strong PROBLEM 15.6B

FOX GAMES

a.

Oct 25 Inventory of Raw Materials 1,200,000$Accounts Payable (Sutaki) 1,200,000$To record purchase of 15,000 parts from

Sutaki for 120,000,000 due in 30 days. Exchange

rate, $.01 (120,000,000 x $.01 = $1,200,000).

Nov 15 Accounts Receivable (British Vibes) 320,000$

Cost of Goods Sold 160,000Inventory of Finished Goods 160,000$

Sales 320,000To record sale of 500 consoles to British Vibes

for 200,000, due in 30 days. Exchange rate $1.60

(200,000 x $1.60 = $320,000).

24 Accounts Payable (Sutaki) 1,200,000$

Gain on Fluctuations in Foreign Exchange Rates 50,000$

Cash 1,150,000To record payment of 120,000,000 liability to Sutaki

and to recognize gain from decline in exchange rate:

Original account balance 1,200,000$Amount paid 1,150,000

Gain from decline in exchange rate 50,000$

Dec 4 Inventory of Raw Materials 56,000$

Accounts Payable (Swiss Plastics) 56,000$

To record purchase of 5,000 black cases from Swiss

Plastics for SFr80,000, due in 60 days. Exchange

rate, $.70 (SFr80,000 x $.70 = $56,000).

15 Cash 310,000$

Loss on Fluctuations in Foreign Exchange Rates 10,000

Accounts Receivable (British Vibes) 320,000$Collected 200,000 receivable from British Vibes

when exchange rate was $1.55 per British pound:

Original receivable 320,000$Amount collected (200,000 x $1.55) 310,000

Loss from fall in exchange rate 10,000$

21 Accounts Receivable (Sounds) 8,000,000$Cost of Goods Sold 5,000,000

Inventory of Finished Goods 5,000,000$Sales 8,000,000

To record sale of 6,000 consoles to Sounds for

NOK40,000,000, due in 30 days. Exchange rate $.20

per krone (NOK40,000,000 x $.20 = $8,000,000).

General Journal


P.15.6B


40/44

PROBLEM 15.6B

FOX GAMES (concluded)

b.Dec 31 Accounts Payable (Swiss Plastics) 1,600$Gain on Fluctuations in Foreign Exchange Rates 1,600$

To adjust balance of SFr80,000 liability to Swiss

Plastics to amount indicated by year-end exchange rate:

Original account balance 56,000$

Adjusted balance (SFr80,000 x $.68) 54,400

Required adjustment (gain) 1,600

Dec 31 Loss on Fluctuations in Foreign Exchange Rates 800,000$Accounts Receivable (Sounds) 800,000$

To adjust balance of NOK40,000,000 receivable from

Sounds to amount indicated by year-end exchange rate:

Original 8,000,000$Adjusted balance

(NOK40,000,000 x $.18) 7,200,000

Required adjustment (loss) 800,000

c. Computation of unit sales price:

Sales price, 500 units, in British pounds 200,000Sales price, 500 units, in U.S. dollars

(200,000 x $1.60 per pound) 320,000$

Sales price per unit ($320,000 500 units) 640$

Alternative computation, using sale in kroner:

Sales price, 6,000 units, in Norwegian kroner NOK40,000,000Sales price in U.S. dollars (NOK40,000,000 x

$.20 per krone) 8,000,000$

Sales price per unit ($8,000,000 6,000 units) 1,333$

d. Computation of exchange rate for yen on Nov. 24:

Amount paid, $1,150,000, divided by liability in yen,

120,000,000, equals exchange rate, $.0096 per yen.

e. (1)

(2)

General Journal

Adjusting Entries

Fox Games could have hedged its position in foreign accounts payable by purchasing

and equivalent amount of future contracts in these currencies, maturing at the same

time as the liabilities must be paid. These contracts are essentially receivables in foreign

contracts. Any gains or losses on the foreign payables would then be offset by a

counterbalancing loss or gain on the future contract.

Foxs position in its foreign receivables could be hedged by selling future contracts in

those currencies. From the viewpoint of the seller of a future contract, the contract is a

liability to pay a fixed amount of foreign currency at a future date. Thus, Fox would be

creating foreign payables to offset its foreign receivables.


P.15.6B (p.2)


41/44

20 Minutes, Medium PROBLEM 15.7BFCPA VIOLATIONS

Under the amended FCPA, activities aand dare illegal because both payments are intended to

help company P obtain business it may not otherwise have been awarded. Activities band c

would be considered facilitating payments to speed up governmental service bor to encourage

a higher level of service c. All activities are bad management practices because they allowcountry Qs government and its employees to continue to believe that bribery and facilitating

payments are an acceptable business practice. Alternative solutions the manager should

consider include showing the government that company P is invested in the future of country Q

and its people. Making long-run commitments to help Qs economy and invest in the education

of its population may make the government more amenable to doing business with company P.


P.15.7B


42/44

40 Minutes, Medium CASE 15.1BRISTOW LIMITED

If Bristow intends to pursue a more aggressive globalization strategy, entering into a joint

venture with Kale may prove beneficial even though it involves some relinquishment of control.

Having operations in other foreign locations, Kale will likely be familiar with the complexities

of doing business in other countries. Bristows managers would have an opportunity to learn

from Kale, allowing Bristow to more easily establish foreign operations in the future.

SOLUTIONS TO CRITICAL THINKING CASES

There are many factors that must be taken into account when faced with multiple globalization

strategy choices. These factors include (but are not limited to) control issues, feasibility issues,

cost, and fit between a particular choice and the firms long-term global strategy. If Bristow

chooses to simply export to Country Y to satisfy the needs of Kale, it will maintain strict control

over production and quality, but will face high shipping costs and longer delivery times. If

Bristow chooses to export, information on more efficient shipping options would be of greater

importance.

To maintain a high level of control and reduce shipping times, Bristow may opt to purchase the

local company and operate it as a wholly-owned subsidiary. This option would likely involve a

substantial outlay of capital to update the facilitys existing technology. Bristow would need to

do an extensive analysis of this option to determine if the return on the investment in thesubsidiary would be satisfactory. Bristow would need to address the questions of whether it had

the necessary capital (or how to obtain it), how the subsidiary would be staffed, and whether

enough business could be obtained to make operating the facility profitable. Bristow would also

need information regarding taxes and other governmental laws and regulations. Given

Bristows lack of experience in international activities, establishing a wholly-owned subsidiary

may prove very difficult.

If issues of control are not of primary importance, Bristow should consider licensing its

technology to a domestic firm or establishing a joint venture with Kale. A licensing agreement

would allow Kale to be supplied with Bristow products on a timely basis, but without a

substantial investment of capital and with less risk. Before entering into such an agreement,Bristow would need to ensure that the licensed firm would not take away its regular business

by selling its products to Bristows customers in Malaysia.


Case 15.1


43/44

50 Minutes, Medium CASE 15.2

INTERNATIONALACCOUNTING STANDARDS

www.iosco.org

Student opinions will vary on the topic. Interesting background information can be located by

browsing the IOSCO web site at:


Case 15.2
http://www.iosco.org/http://www.iosco.org/


44/44

30 Minutes, Medium CASE 15.3

INTERNATIONAL CORPORATE GOVERNANCEETHICS, FRAUD & CORPORATE GOVERNANCE

Many countries around the world have different standards for disclosure, timeliness of

reporting, and accuracy. Importantly, only recently has corporate governance become animportant issue for international companies. The OECD Web site says:

Corporate governance deals with the rights and the responsibilites of a companys

management, its board, shareholders and various stakeholders. How well companies

are run affects market confidence as well as company performance. Good corporate

governance is therefore essential for companies that want access to capital and for

countries that want to stimulate private sector investment. If companies are well run,

they will prosper. This in turn will enable them to attract investors whose support can

help to finance faster growth. Poor corporate goverance on the other hand weakens a

companys potential and at worst can pave the way for financial difficulties and even

fraud (www.oecd.org)

Chapter 15 Solutions Manual

Documents

Transcript of Chapter 15 Solutions Manual