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    Chapter 15 Global Business Accounting Part 2

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    Andrea Reyes
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    710 : Chapter 15 Global Business and Accounting LO1 Define four mechanisms companies use to globalize their business activities. Companies globalize thelr business activities through exporting, licensing, joint ventures, and wholly owned subsidiaties. Multinational companies use a global sourcing approach, LO2 identify how global environmental forces—(a) political and legal systems, (b) economic systems, (c) culture, and (d) technology and infrastructure—affect accounting practices. Countries use their political and legal systems to transfer and control business assets. Market versus centrally planned economic systems create different demands fr financial reporting. Culture influences business relationships through beliefs and expectations of customers and business associates. The technology and infrastructure of each global location will affect the type and costs of business activities and related financial accounting reports, LO3 Explain why there is demand for harmonization of global financial reporting standards. Cross-border differences in accounting and reporting create analysis and comparability problems between and among companies, The need for comparable information has led to the demand for harmonization. LO4 Demonstrate how to convert an amount of money from one currency to another. To convert, for example, a foreign currency to an equivalent U.S, dollar amount, multiply the foreign currency by the foreign exchange rate. To convert a. U.S. dollar amount into an equivalent amount of foreign currency, divide the dollar amount by the exchange rate. LOG compute gains or losses on receivables or payables that are stated ina foreign currency when exchange rates fluctuate. The receivable or payable is recorded on the date the transaction is agreed to using the prevailing exchange rate. When ‘exchanging cash completes the transaction, the exchange rate at the completion date is used to record the cash flow; the difference ‘between the cash exchanged and the receivable or payable is recorded as a foreign exchange gain or loss. LOB Describe techniques for “hedging” against losses from fluctuations in exchange rates. Hedging is offsetting the potential for losses from foreign exchange rate fluctuations. It can be accomplished by having offsetting receivables and payables in the foreign currency or by buying or selling foreign ceureney future contracts 107 _iscuss how global sourcing increases product cost complexity. When some of the activities of designing, developing, producing, marketing, and servicing a product or service occur in more than one country, then global considerations affect product costs. These considerations include foreign exchange gains and losses, taxes, import and export duties, trade agreements, foreign trade zones, and limitations on currency flows. ‘Adoption of IFRS (p. 698) Means abandoning the country's financial reporting standards and replacing them with International Financial Reporting Standards (IFRS), Convergence with IFRS (p. 698) A process by which a county's financial reporting standards are changed so that the use of their country GAAP standards will produce IFRS “equivalent” financial reports. cross-border financing (p. 697) Occurs when a company sells its securities in the capital markets of another country. exchange rate (p. 699) The amount unit of currency with another currency. costs (0 purchase one exporting (p. 692) Selling a good or service to a foreign customer in a foreign country. foreign trade zones (p. 694) Goods imported into these designated areas within a country are duty free until they leave the zone, future contracts (p. 708) A contract giving the right to receive A specified quantity of foreign currency ata future date. anufacturing, and marketing across national boundaries, slobalization (p. 692) Occurs as managers become aware of and engage in cross-border trade and operations. harmonization of accounting standards (p. 697) ‘The slobalization of similar accounting methods and principles throughout the world, Scanned with CamScanner nape 15 Global Businss and Accounting edging (P- 70S) The practice of risk of 1088 associated with foreign ¢ minimizing oF elimi ninating ‘rrency fluctuations, industrial organizations (p. 695) 34), gow tence no contomeryes nat COMnai industries. South Korean conglomerates, called che ce ind Japanese conglomerates, called Reirerse, cons ope that are grouped as customers and suppliers and usually contain bank. infrastructure (p. 697) Access to transportation, and utilities provided to busine location. communication, sses in each global International Accounting Standards Boa Charged with the responsibility of creat international standards. rd (ASB) (p. 697) ing and promulgating international joint venture (p. 692) A company owned by two ‘or more companies from different countries Demonstration Problem 714 International licensing (p. 692) between company and a foreign party allowing the use of trademarks, patents, technology, designs, processes, intellectual Property, or other proprietary advantage, A contractual agreement market economy (p, 695) ‘and the means of production a allocation of resources and th economy. Exists when ownership of land e private and markets dictate the Output among segments of the planned economy (p. 695) Exists when the government uses Central planning to allocate resources and determine output ‘among various segments ofthe economy. Government ownership of land and the means of production characterize planned econo wholly owned International subsidiary (p. 692) Created through a company's foreign direct investment; involves using domestically generated funds in another country to purchase 100 percent equity control ofa foreign subsidiary. IroxMan, Inc., is a U.S. company that manufactures exercise machines and distributes several lines of imported bicycles. Selected transactions of the company were as follows: i The 4 Oct. Purchased manufacturing equipment from Rhine Mfg. Co., a German company. purchase price was €400,000, due in 60 days. Current exchange rate, USS0.7020 per euro. (Debit the Equipment account.) 18 Oct. Purchased 2,500 racing bicycles from Ninja Cycles, a Japanese company, aptice of 60,000,000. Payment is due in 90 days; the current exchange rate is USS0.0110 per yen. (IronMan uses the perpetual inventory system.) 15Now, Purchased 1,000 touring bicycles from Royal Lion Ltd., a British corporation. The ce purchase price was £192,500, payable in 30 days. Current exchange rate, USSI.65 per British pound. Issued a check to First Bank f 0 of the account payable to Rhine Miz. Co. Issued a check to First Bank for the U.S. do} the account payable to Roya pound. Instructions. 3 Dec. 1S Dee, U.S. dollar-equivatent of €400,000 in payment eM surrent exchange rate, USS0.71 10 per euro, equivalent of £192,500 in payment of 1 Lion Ltd, Current exchange rate, USS 1.60 per British n to record the preceding transactions. & Prepare entries in general journal ae selating tothe account payable to Ninja Cycles. The Decer adjusting ent © Identify some methods that IronMan, a, RSE ati of 8 influence their exchange rate fluctuations. Tne., could use to decrease its exposure to forei Germany, and the United Kingdom that Scanned with CamScanner 712 Solution to the Demonstration Problem “The general journal entries to record the transactions are as follows: " eneral jou GENERAL JOURNAI Date ee ene pleat ." i 280,800 Bish A ‘Payable (Rhine Mig. Co.) fae To record purehase of equjent frm Rhine Mig. Co ior €400,000, exchange rato US$O.7020 per euro {40 000 x USSO.7020 = US$280,800). 18081. inventory « Pee ‘Accouns Payable (Ninja Cycles) Purchased 2,500 bicycles from Ninja Cycles for '¥60,000,000, exchange rae USS0.0110 (¥60,000,000 x US$0.0110 = US$860,000), YSNOv, ‘Inventory .cvessigseseesserebiaes cecesete 817,605 ‘Accounts Payable Royal ion Ud) ssc ssa a1760s Purchased 1000 bieyles rom Royal Lion Lt. or £192,500, up in 30 days, Exchange rate USS! 65 per pound (192,500 x USS1,65 IS$317,625). 3 Dec. Accounts Payabs (Ane Mig, Ca) . Loss on Fluctuations of Foreign Exchango Rates Cath eke a vets reais cdi Paid €400,000 liability to Rhine Mfg. Co. (Ciigital Balance lees amount paid equals los 1US$280,800 ~ [€400,000 > USs0.7110] = 15.Dec. Accounts Payable (Royal Lion Lid) «+... cscs sss es veue e Gain on Fluctuations of Foreign Exchange Rates... . Paid £192,500 liability to Royal Lion Lid. (Original balance ess amount pad equals gain USS317,625 — [£192,500 x US$1,60] = US$9,625).. 280,800, 660,000 660,000 280,800 3,600 284,400 ‘US$3,600). 317,625 = 9,625 ~ 908,000 b. The 31 December adjusting entry forthe account payable to Ninja Cycle aera Date Account Titles and Explanation Debit Credit 41 Dec. Lose on Fluctuations in Foreign Exchange Ratos ............... 18000 Accounts Payable (Ninja Cycles) <2... ee 18,000 To adjust balance of 60,000,000 tabilty to amount : indicated by year-ond exchange rate: : (Original balance less adjusted balance equals loss: cae 'S8660,000 — [¥60,000,000 x US$0.0113} = -US18,000) © _TronMan could use offsetting payables and receivables to control potential foreign exchange rate losses. For example, if IronMan could export its exercise equipment to Japan, then it would have 8 receivable to offset its payable, IronMan could also purchase future contracts maturing al the same time the liabilities were due, Gains and losses on the future contracts would offset gains and losses resulting from foreign currency fluctuations, > Germany has a lower volume and smaller capitalized equities market, Germany uses the ure and is part of the European Union. Banks are a major provider of capital to businesses {a Germany. Japan has keireisu organizations for many of its industrial groups, ‘These salers, retailers, and suppliers who accounting profession is much weaker in both ted Kingdom is most like the Uni States, with active equity markets, a strong accounting profes ion, and si accounting rales. Scanned with CamScanner cnaper 15 Global Business and Accounting theanswers 0 these questions appear om page 737, 1, Which of the following statements ate true about globatiza. yeagitss Mt lobaliza: a Intemational licensing involves the ereation of of anew ccampany that is owned hy two oF more firms from it, ferent countri Exporting involves contracts that allow a foreign com: pany to use a domestic company’s processes, or technology, «Global sourcing involves the close coordination of research and development, purchasing, marketing, and ‘manufacturing across national boundaries, A wholly owned international subsidiary is created when a foreign government owns 100 percent of the equity in a U.S -hased firm, trademarks, patents, 2. Which of the following environmental factors can affect the cost of doing business in a foreign country? (Identify all cor- rect answers.) a. The educational level of the workforce, — bh Laws regulating the transfer of profits out of a country. ¢ Tax and tariff regulations. @_ Restricted access to communication and transportation networks. 3. A country whose citizens are highly group oriented and ‘who accept unequal power distributions between and within organizations would be considered: ASSIGNMENT MATERIAL 1. In general terms, identify several factors that peas different ‘countries to develop different accounting principles. i i ids Board? 2 What is the International Accounting Standart Wy has the Bound ‘been unable to obtain uniform global pplication ofits standards? is coi ing into joint aA in company is considering entering A vente with a apanese finn. Describe what ultra differences each party should consider. 4. Consider Exhibit 15-4. Explain the cultural differences between the Sweden and Brazil. : a conomic system * Wy rt a a en business relationship? © Provide an example 10 show how the following environ- ‘mental forces affect accounting practices: Political and Jegal systems 13 .Individuaistic and low power distance, ‘. Collectivist and high power distance © Individuatistic and high power distance 4. Collectivist and low power distance. 4. On | March, Laton Products (a Australia firm) purchased man- ufaturing inputs fom a Mexican supplier for 20.00 pen, payable on 1 June. The exchange rate for pesos on 1 March ‘was AUDS0.I7. Ifthe exchange rate increases to AUDSO.19 on June, what amount of gain or loss would be reported by Laton relied tothe eurency exchange? a. AUD$400 gain. b. AUD$200 loss. . AUD$400 loss. ‘d. AUDS$200 gain, On 1 January. a German company purchased goods from a U.S..firm for US$50,000, payable on 1 Marc, The exchange rate for the euro on | January was USSI.10. Ifthe exchange rate increases to USS1.12 on | March, what ‘amount of gain Gr loss would the U.S. firm report related to currency fluctuations? US$ 1,000 gain : USS1,000 loss. 1US$500 gain, No gain or loss would be reported. Bore Discussion Questions b. - Economic systems Culture Technology and infrastructure f Discuss two ways in which the Foreign Corrupt Practices Act has affected U.S. companies, Explain two ways in which a company that makes purchases ‘on account from foreign companies can protect itself against the losses that would arise trom a sudden increase in the foreign exchange rate, 9, ‘What does the Bobaltation of business mean? Think of {wo companies with which you are familian Aeseribe thee evel of globliation nt HOM WOU You 10, You've just read in The Wall Street Jo * urnal that the U.S, dolar has weakened relative tothe euro. All else equal, wit would you expect to happen tothe ase jckets sold inthe United States? Why? oF Talian leather Scanned with CamScanner 714 ‘Chapter 15 Global Business and Accounting 411. What is the difference between an international licensing 14, A French furniture maker agrees (0 purchase wood stain agreement and an international joint venture? from a Singapore paint manufacturer. If all payments are 19 ‘be made in Singapore dollars, which company bears the risk 12, To maintain a high level of control over production of exchange rate gains and losses? operations and final product quality, what types of : , globalization activities could a company engage in? 18. What is meant by the phrase natural hedging agains, ‘exchange rate risk? 13, How might the requited financial reports differ between countries that are individualistic and countries that are collectivist? | Foreign Cumency Translations BRIEF EXERCISE 15.1. Translate the following amounts of foreign currency into an equiva- Brief Exercises tos Jent number of U.S. dollars using the exchange rates in Exhibit 15.7. a, £800,000 b. ¥350,000 e €50,000 1 BRIEF EXERCISE 18.2 Assume that a Malaysian company makes a purchase from a British Curren ‘company and agrees to pay a price of £2 million. 04, wos &. How will the Malaysian company determine the cost of this purchase for the purpose of recording it in its accounting records? b. Briefly explain how the Malaysian company carr arrange for the payment of pounds to the British company. Gurreney Strength BRIEF EXERCISE 15.3 A recent newspaper shows the exchange rate for the British pound 195 at USS1.44 and the yen at US$0.0108. Does this indicate that the pound is stronger than the yen? Explain, Exchange Rate Fluctuations BRIEF EXERCISE 15.4 Explain how an increase in a foreign exchange rate will affect a Sin- us - ‘gapore company that makes: 8. Credit sales toa foreign company at prices stated in the foreign currency. b. Credit purchases from a foreign company at prices stated in the foreign currency. Credit sales to foreign company at prices stated in Singapore dollars. Currency Choice BRIEF EXERCISE 15.5 You are the purchasing agent for a Hong Kong business that pur- 16, 196 chases goods on account from companies in Mexico. The exchange rate for the Mexican peso has been falling against the Hong Kong dollar and the trend is expected to continue for at least several wonths. Would you prefer that the prices for purchases from the Mexican companies be specified in Hong Kong dollars or in Mexican pesos? Explain, Currency Strength and Gains BRIEF EXERCISE 15.6 Hutchison is a H.K.-based multinational corporation. Foreign sales and Losses fare made at prices set in HK. dollars, but foreign purchases are often miade at prices stated in for- ign currencies, If the exchange rate for the H.K. dollar has risen against most foreign currencies, by throughout the year, would Hutchison have recognized peimarily gains or losses as a result of exchange rate fluctuations? Explain. i BRIEF EXERCISE 15.7 When business transactions are conducted internationally, cultural Culture Ener differences must be taken into consideration, Geert Hofstede isa leading researcher on how cul on eee tural variables can affect such international arrangements. Hofstede has a Web site where he ie we y quoted as saying Scanned with CamScanner cnapte 5, Global Business and Accounting 15 For those who work in internation i jnother cultures behave, We lent business, itis sometimes amazing how diffe the stme—but they are not. Therefor’, 8 HUMAN instinct tat een re eonle pusd on ow We operate nour eC Boat ele” al ele Goto Hofstede’s Web site (www eert-hotstedeg gseanbe hindered by a lack of understanding ore die AP of how business deal altura diferences BRIEF EXERCISE 15.8 Bell Corporation has a recei and Currency Fluctuation Eifects BE 15, C receivable dei ir on Mexican essing he om Minit in Beish pounds Currency Fluctuation Effects as elated to both is pound-related receivable and ite eel econ foreign exchange 1,109 cies increase or decrease eso-denominnte eigneure ‘decrease in value from ted te tamaton othe gles ansaetion (othe settlement date EXERCISE 15.9 in cx R00 inars. Using ean Cpbany Purchased a shipment of fabrics ftom Bahrain Exchange Rato Computation pore dollars? "BC Fale, what isthe value of this contract in Singa- 194 fone EXERCISE 15.1 The following are eight global business terms used in this chapter: Global Business Terminology Hedging Planned economy Harmonization * 01,108 Globalization international licensing Exporting Foreign exchange Intemational Accounting tisk Standards Board Exch ofthe following statements may describe one of these terms. For each statement, indicate the slbal business term described, or answer “None” if the statement does not correctly describe any ofthe terms. & The amount it costs to purchase one unit of currency with another currency. | 1b Selling a good or service to a foreign customer. © Accross-border contractual agreement allowing one company to use the trademarks, patents, or technology of another company. ae The peice of minimizing "or eliminating risk of loss associated with foreign currency fluctuations. ‘Markets dictate the allocation of resources and output among segments of the economy. The group charged with the responsibility of creating and encouraging the use of international financial reporting standards. e me up of two or three students, choose a publicly traded global External Financial Reports and “anual report ‘data to answer the following questions crue : scat regions does the company operate? £ last geographical regions dons represented by foreign sales? How has this changed over ae ‘Whats the proportion of tot : Re past five years? sapany recently undertaken 10 increase/deerease globalization (Cor © What efforts has the com) example, joint ventures, licensing agreements, etc.)? "5 hedging practices/policies’ : Het are to come Ban ri eessful, discontinued, or resulted in asset losses? I so, Have any overseas: 1 Ghat banpenct essvely do you feel this company is pursuing globalization? Scanned with CamScanner 716 Understanding Exchange Rate Conversions 104 Locating Informal ernational Business 02, 107, Los Who Loses 02, 05 Foreign Currency Transactions 04,105 (Chapter 15 Global Business and Accounting scenarios, use the current exchange rates in The Wall EXERCISE 15.3 For cach ofthe following scenarios, use the curr c Sireet Journal or fom an Inter sie sch as WHW.Xe.comAace to compute the required mount A Citron automobile is advertised in France for 15,000 euros. What is the U.S, dollar alent of 15,000 euros? 7 . “food emperium ie importing foreign hot sauce from Brazil for 7,000 reals. What isthe U.S. dollar equivalent? : & Yoware uaveling on safari in South Afticd and have brought USS3,000 in spending money, How many South Aftican rand Will you receive for spending money? 4. While traveling in Europe, you cross the border between Germany and Switzerland. You have 150 curos left from your German travels when you spot a souvenir in a Swiss shop for 250 Swiss franes. Do you have enough spending money to buy the souvenir if you conven Your euros to Swiss francs? EXERCISE 15.4 The State Department of the U.S. government maintains an Internet site conaiing information on various countries (wowstate gor) The site includes a database under ‘the Countries and Regions tab. Use the data of other publicly available data to answer the following ‘questions about Indonesia, What are the country’s main exports anid imports? ‘What isthe educational and job classification composition of the labor force? How would you describe the infrastructure and technology base of the country? ‘What are the political and legal risks of doing business there? Af you were advising a U.S. company that wanted to locate a wholly owned subsidiary in Indonesia, what aspects of the country would you stress that management take into account when deciding whether to invest there and how to organize the subsidiary’s manufacturing process? eRe re EXERCISE 15.5 Indicate whether each of the companies of individuals in the following independent cases would benefit more from a strong euro (relatively low foreign exchange rates) or weak euro (relatively high foreign exchange rates). Provide a brief explanation of your reasoning. Airbus (@ European aircraft manufacturer that sells many planes to foreign customers). A Nikon camera store in Paris, France (Nikon cameras are made in Japan). ‘Toyota (made by the Japanese auto manufacturer in Japan). ‘The Hong Kong dealer for MAN SE trucks (made in Germany). A European tourist visiting Singapore. A small store that sells Tuly-made video recorders in Venice, accounts receivable or payable). Pe PPE Italy (the store has no foreign EXERCISE 15.6 ‘The following table summarizes the facts of five independent cases (labeled a through e) of U.S. companies engaging in credit transactions with foreign corporations while the foreign exchange rate is fluctuating: a Column Type ot Currency Cred Used in Transaction Contract case 1 2 ee a Sales Foreign curency : aE ay Purchases US. dollars ae ¢ Foreign cumency @ Sales aa ies Purchases Forigneureney You are to fill in each blank space aller evaluain ‘other three columns. The content of each coum the blank spaces are described as follows: ig the information about the case provided in the wand the word or words that you should enter in Scanned with CamScanner vr 15 Global Business and Accounting rote 0 ; v7 indicates of ered ‘ Column 1 indicates the whe of eredit transaction in Which the U.S, comp, the foreign corporations. The answer entered in this column should pedeT#MEed with purchases either Sales or ‘Column 2 indicates the currency in wh (15. dallas or Foreign currency. indicates the direction in whiel i Column 3 in n which the foreign currency exch date of the credit ange rate has men terween the date ofthe ered transa of settlement, The anaweeg a eas moved cotumn may be either Rising or Falling, "er entered in this Column 4 indicates the effect of the exchange rate fluctuation on the my. The answers entered in this column are to be selected fro ass, ot No effec N the invoice price is stated, The answer may he eth ither Income of the American om the following: Gain, EXERCISE 15.7 Visit the LASB Web site at ww w.insphus.com/eountey/useias itm He a, Name three governments that requires companies to prepate their ff, ome accordance with IFRS list ther shares on the country's securities markers om wo : Name three governments that will not allow companies that prepare their financial reports only in accordance with IFRS list their shares on the country's securities markets EXERCISE 15.8 In adidas AG, Herzogenaurach’s 2012 financial statements in Aj ) s adidas AG, Herzogenaur dix Aat the end of this textbook, read note I. Find the information about adidas's fag internation cross = cperions. : 1, 52 ‘a. Inwhat countries does adidas have operations? b, What environmental factors does it need to consider when expanding to foreign countries ACidas and why? 5 GROUP EXERCISE 15.9 Match the following transactions, which are deriominated in a foreign Matching Foreign Excha currency, with the appropriate Foreign currency and exchange gain or loss effects. Gains and Losses, 105 Foreign Foreign Matching i Transaction Currency Exchange Gain Transaction Letter Effect or Loss & Export sale i Pa Appreciates Loss 'b. Import purchase x 1 Appreciates Gain ‘Foreign currency receivable 2 Dopreciates Gain ‘ Sei 2." Depreciates Loss: ‘4. Payable in foreign currency i i . x lobal Sourcing Costs EXERCISE 15.10 Reconsider Exhibit 15-10, panel B, in the chapter. Use current exchange Globe males 10 ine te global costs of making @ Barbie™ doll. Has the total cost increased or Mattel Inc. decreased as a result of changes in exchange rates? 104,107 5-6 in this chapter, Assume a United Kingdom company, Financial Staternent 1 Stock Brit the London Exchange using U.K. GAAP and the New York retreat ust prepare a reconciliation from U.K. GAAP (o U.S. GAAP. This ing difference associated with revaluations of fixed asses: EXERCISE 15.11 Refer to Exhil Exchange. Brits International mu "eeonciliation shows the follow Shareholder's Equity (623,740) 4,570,699 Scanned with CamScanner 718 Chapter 15 Gobel Busnes sn Acaitng Required: a Nout why the adjustment (0 U.S. GAAP resulted in additions to profit, 1K. Bsplain why there are aitons to shartiolders' equity and why those adlions se reste than the additions to profit. ec. Byplain why there is a deduction to shareholders equity Honda Motor Company's Uso EXERCISE 15.12 M1 via Motor Company reports that it has manufacturing Facilites iq ° in Japan. Several are Of IFRS or U.S. GAAP, over 20 locations around the world, Only four of those"locations are in in the Pe US. Barope, and South America, Ienity the advantages and disadvantages for Honda Motor os Company’of reporting its financial results using cither IFRS or U.S. GAAP. EXERCISE 15.13 Rescarch China and write a brief comparison of Chinese political-lega, ‘conomic, cultural, and infrastructure factors as contrasted t6 those in the U.S. Explain how theag factors might affect accounting practices in the two countries, Probl em Set A Problem 15.1A Crackle Cookie Company is a relatively new company and so far has sold its products only in its home country, Denmark. In December, Crackle determined that it had excess capacity to produce more of its special Christmas cookies. Iti trying to decide whether to use that capacity to ship a batch of cookies overseas. The marketing department has determined that the United States and Great Britain are the two excess capacity to produce only one batch, which can be shipped to either country. The materials and labor cost to produce the batch amount to 8,500 kroner. The marketing department, which joeated aU-S. shipping company that could detiver to either location, also provided the following infortnation: United States “Great Britain Stipping cost... 3,000 US, vat. "2,000 US. dollars 5 Duties/customs chargos Sk Sanne ‘and miscellaneous: ay Bh ene e seling expenses. 5.4..." 400US. dollars 480 British pounds Tota + 8:200 U.S, dollars ~ 2.800 British pounds Exchango rate data...) 4 krone ‘krone = 0.115 British pounds Instructions % JF Crackle exports the batch to the United Stats, what isis estimated profivioss in Danish kroner? If Crackle exports the batch to Great Britain, what is its estimated proftoss in Danish kroner? © Mf the British pound has exhibited rather Inrge fluctuations relative to the Danish kroner Fecently, how migh this impact Crackle's decision as to which country to ship to? Scanned with CamScanner pone 5 dal Busi Ss aNd Acouning 19 jem 152A Buropa-West is an Aug re manufacturers for distibution ut COmporation th ure pot Austin Aeon has aulomaties from Gains and Losses Journalizing ae hase involved the following Exchange Rate urchased automobiles from { Purchased automobiles trom Stockh, (a1, L400, t88 anor TaKGD Nol Motors in § payable in 60 days, Current exch Motors in Swish kronor for i change rate Wor for 820,000,000, the perpetual inventory system) "°AUDSO. 1286 per hoon, ona Wg Made year-end adjusting entry relat 1 Dees i IY relating to the $} S1D& stockholm Motors. Current exchange rae, A 0 acconnt payable to igen, Issued acheck to Workd Bank for AUDS2 son a er He payable to Stockholm Motors, 800 in Full payment ofthe account instructions are in general journal form the entries necessary to reco c compute the exchange rte pic) of the krona in Asai ee Explain a hedging technique that Europa-West might have used to protect mee f posiilty of losses resulting from a significant increase in the exchange rate forthe anna © problem 15.3A Waller, Inc. is a U.S. company that has business operation in change Rates and Income Waleron’s Canadian operation exports the majority of is output to customers inthe Used Eons ne mee «lls only a small portion of its output to Canadian customers. The following budgeted income 194, 10,10, 197 satement for Wallerton separates the revenue and costs that are in Canadian dollars from those in. US. dollars. Wallerton wants to know the impact of three possible exchange rate scenarios for the Canadian dollar on its budgeted income statement (assume one Canadian dollar is equivalent to either $0.72, $0.77, or $0.82 in U.S. dollars). 3 CAME CH on Certo not eae eur neue _ : US. Canadian $a0400 C$ 4 Sas. ost of goods sold aia (196) 10 $7208) sed to Wallerton’s budgeted income statement in at Complete the chart in the working papers fel Us, dollars: Scanned with CamScanner 720 See para expenses ie Ee (@)US. toed (@)US. variable 10% of sales z (10) Tote Z 395.252 (11) Operating earnings. Tetorest expenses (2) US. te z (13) Canadian = (14) Total Earnings before ta b. Explain the impact of a stronger Canadian dollar on bu \dgeted earnings before tax. Problem 15.48 _Ulsa Company, a Singapore Company, has manufacturing subsidiaries in ‘Malaysia and Malta. It is considering shipping the subcomponents of Product Y to one or the other ofthese countries for final assembly. The final product will be sold in the country where itis assembled. Other information is as follows: ie ee Malaysia “Malta ~ ‘Average exchange rae. - 2.16 ringaits 20 tra Inport eens nee 15% Income tax rate. : 20% 10% Unit sling price of Product. 645i f inggits 70 li ae son er: iy 215 ringgits _ 201i Maer fink be ei a ogo 800 Jn both countries, the i c abseil he iy duties are based on the value of the incoming goods in the receiving Instructions & For each country, pre} i ’, Prepare an income i To coh St ie statement on a per-unit ba: b. In which country would the hi In which country would the denominated in that hest profit per unit (in Singapore dollars) be earned? st total profit (in Singapore dollars) be earned? Scanned with CamScanner r Instructions crept 18 Global Business and Accounting problem satay ein nidents and research th site, WHMUSEEBOW, p formation on vn that explains how the North rious trade agreements, Pre aoc pager h American ti . Prepare a short presentation | Explain how trade agree Free Trade Agreeme SEAN. Exp “erements eb business aml pee van ee om he jem 15.6A Wolk 724 ASEAN Initiative. A government Web NAFTA va, ASEAN 02, WT aw ae fe Computer is an A tsonal__ A Comprehensive Problem: a Maly ot te So the cut company that manufactures portable pers nal A Comprehensive Probe or flea en ies. as well asin Auemnat St Purchased abroad, and the finished Journalizing Exchange Rate eth eldin countries as w ‘alia. Among the recent transactions of Wolfe Effects 2 38 Oct, Purchased from Mitsutonka, a Japanese com, Era price was ¥180,000,000, payable in 30 da 8. yen. (Wolfe uses the perpetual i it 5 nventory method; debit the Inventory of Raw Materials gor. Sold 700 personal computers to the Bank of England for The cost of the computers, to be debited to the Cost of Co oe’ it 30 days ‘Goods Sold account, was cost of goods sold, credit Inventory ) Issued a check to Ink i é 29Now. Issued a check to Inland Bank for AUDSI,836,000 in ull payment of account payable 2Dec. Purchased 10,000 gray-scale monitors from German Optical for €1,200,000, payable in 60 days. Current exchange rate, AUDS0:7030 per euro. (Debit Inventory of Raw Materials.) 9Dee. Collected dollar-equivalent of £604,500 from the Bank of England. Current exchange rate, AUDS1.63 per British pound. 11 Dec. Sold 10,000 personal computers to Computique, a Swiss retail chain, for ‘SF123,750,000, due in 30 days. Current exchange rate, AUDSO,6000 per Swiss franc. ‘The cost of the computers, to be debited to Cost of Goods Sold and credited to Inventory of Finished Goods, is AUDS7,400,000. Prepare in general journal form the entries necessary to record the preceding transactions. 2 b. Prepare the adjusting entries needed at 31 December for the €1,200,000 account payable to German Optical and the SFr23,750,000 account receivable from Computique. Year-end exchange rates, AUDS0.7000 per euro and AUDS0.5980 per Swiss franc. (Use a separate Jounal entry to adjust each account balance.) 2 : © Compute (to the nearest Australian dollar) the unit sales price of computers in Australian dollars in either the 9 November or 11 December sales transaction. (The sales price is the Compute the Sangede for the yen, stated in Australian dollars, on 27 November. Explain how Wolfe Computer could have hedged its position to reduce the risk of loss from exchange rate fluctuations on (1) its foreign payables and (2) its foreign receivables. oe Probl ‘der the 2012 financial statements of adidas AG, Herzogenaurach, in Append ae dormer oak Use this report to assess the globalization of adidas by ‘swering the following questions: ‘ol ageeaiadt a i \didas international operations? ; b ie ST oii “Currency translation.” What exchange rate is used to translate % abilities for reporting purposes? e feign set an Ta inder “Derivative Financial Instrumens.” Is there any evidence bor a seat tak ces any formal hedging to attempt to reduce the impact of currency exchange risk? 4 Doyoubelieve adidas AG, Herzogenaurach isa multinational company? Why ot why not? adidas AG, Herzogenaura Globalization ‘LO1, Lo2, L08, 107 Scanned with CamScanner 722 Exchange Rates and Export Decisions 104,105, 107 Gains and Losses Journalizing Exchange Rate 101, Lo4, 105,106 Exchange Rates and Income Effects 104, LOS, 106, 107 (Chapter 18" Globel Business and Accounting Problem 15.1B Monster Cookie Company is located in Denmark. Itis a relatively new com. pany and so far has sold its products only in its home country. In December, Monster determined that it had excess capacity to produce more of its special Halloween cookies. Its trying to decide ‘whether to use that capacity to ship a batch of cookies overseas. The marketing department has dletermind that the United States an Great Britain are the two most viable markets. Monster has ‘enouigh excess capacity to produce only one batch, which can be shipped to either country, The materials and labor cost to produce the batch amount to 9,000 kroner. The marketing department, which located a U.S. shipping company that could deliver to either location, also provided the following information: ae United States 2,800 U.S. dollars seling expenses ‘ ‘otal salos revenue. .-...,:.. 6,000 US. dollars ~ Exchange rate data... krone = 0.16 US. dollars Instructions a.” If Monster exports the batch to the United States, what is its estimated profitloss in Danish kroner? b. If Monster exports the batch to Great Britain, what is its estimated profivloss in Danish kroner? If the British pound has exhibited rather large fluctuations relative to the Danish krone recently, how might this impact Monster's decision as to which country to ship to? Problem 15.28 Euroam is an Australian corporation that purchases motors from European ‘manufacturers for distribution in Australia. A recent purchase involved the following events: 1Dec. Purchased tractors from WMB Motors for SFr4,000,000, payable in 45 days. Current exchange rate, AUDSO.75 per Swiss franc. (Euroam uses the perpetual inventory system.) 31 Dec. Made year-end adjusting entry relating to the SFr4,000,000 account payable to WMB Motors. Current exchange rate, AUDS0.78 per Swiss franc. 15 Jan. Issued a check to World Bank for AUDS$3,080,000 in full payment of the account payable to WMB Motors. Instructions a. Prepare in general journal form the entries necessary to record the preceding events. b. Compute the exchange rate (price) of the Swiss franc in Australian dollars on 15 January. ¢ Explain a hedging technique that Buroam might have used to protect itself from the possibility of losses resulting from a significant increase in the exchange rate for the Swiss franc. Problem 15.98 _Jelton, Inc. is a U.S. company that has some business operations in Canada, ‘The Canadian operation exports most of its output to the U.S., but incurs most of its costs in Canadian dollars. The budgeted Income statement for next year is shown below. Jelton wants to know the impact of three possible exchange rate scenarios for the Canadian dollar on its budgeted income statement (assume one Canadian dollar is equivalent to either $0.70, $0.80, of $0.90 in US, dollars). Scanned with CamScanner qnapter 15 Global Business and Accounting a Ere acincy aceasta ea SLOT L ey Ey ESS Peptic a ~ | cst onde 08. © Gross profit. apg rene ai ices Operating earings. Wns InorestexPOnseS | Earnings before tax Additional Information Possible Exchange Rate | Bees yore ; fs : 080” 080 Instructions ‘a. Complete the chart in the working papers related to Jelton’s budgeted income statement in US. dollars: “c$=$0.70 | cs = 80.80 cs = $0.90 mus. : = (@) Canadian (9) Total Gost of goods sold @us. (©)Canacian (6) Total $224.00, (Gross profit Operating expenses: (8) US. fixed (9) U.S. variable, 10% of salos (o) Total | (11) Operating earnings _ _-hlerest expenses: | aus. | (18) Canadian “ a t ae i 5 : rine roto $146.65 $148.55 & apn an impac 4 stonger Canaan dollar on earnings before tax. Scanned with CamScanner 723 7" Exchange Rates and Product Decisions 104, 107 NAFTA vs, CAFTA-DR 2, 7 ae A Comprehensive Problem: Jouralizing Exchange Rate Effects ‘104, L05, Loe A facturing subsidiar Haliday Company, a Singapore Company, his manufacturing subsidiaries iy Problom toe Ikis considering shipping the subcomponents of Product X to one of the Thallapewe counties for final assembly. The final product willbe sold in the county where, aed, Orher information is as follows: © Average oxchange rato... import duty. | Aneomme tax rate, . | Unit sting price of Product X | Price of euboomporient, | Number ofunt ob sl In both countries, the import duties are based on the value of the incoming goods in the receiving ‘country’s currency. Instructions ‘a, For each country, prepare an income statement on a per-unit basis denominated in that country’s currency. < mae b, In which country would the highest profit per unit (in Singapore dollars) be eared? © _Inwhich country would the highest total profit (in Singapore dollars) be earned? Problem 15.88 Form a group of students and research Dominican Republic~Central America United States (CAFTA-DR) trade agreement for central America. A government Web site, www.ustr.gov, provides information on various trade agreements. Prepate a short presentation or ‘paper that explains how requirements for CAFTA-DR differ from those of the North American Free Trade Agreement (NAFTA), Explain how trade agreements help businesses and people in various countries, Problem 15.6B Fox Games is a U.S. company that manufactures computer game consoles. Many of the components for the consoles are purchased abroad, and the finished product is sold in foreign countries as well as in the United States. Among the recent transactions of Fox are the following: 25°Oct, "Purchased from Sutaki, a Japanese company, 15,000 parts. The purchase price was ¥120,000,000, payable in 30 days. Current exchange rate, US$O.01 per yen. (Fox uses the perpetual inventory method; debit the Inventory of Raw Materials account) 15Nov, Sold 500 consoles to British Vibes for £200,000, due in 30 days. The cost of the consoles, to be debited to the Cost of Goods Sold account, was US$160,000. Current exchange rate, USS!.60 per British pound. (Use one compound journal entry to cord the sale and the cost of goods sold. In recording the cost of goods sold, credit Inventory of Finished Goods.) 2ANov. Jesed 4 check to Inland Bank for US$1,150,000 in full payment of account payable to Sutaki 4 Dec. Purchased $,000 black cases from Swiss Plastics for ‘SF 180,000, payable in 60 days. ee Curent exchange rate, USS0.70 per Swiss frane, (Debit Inventory of Raw Mater) Dee, Coleces dollar

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