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Learning Character of
Exercises Topic Objectives Assignment
15–1 Accounting terminology 1–8 Conceptual
15–2 Identifying globalization activities 1, 2 Conceptual
15–3 Exchange rate conversions 4 Mechanical
15–4 Researching foreign countries 2, 7, 8 Conceptual, analytical
15–5 Currency fluctuations 2, 5 Conceptual
15–6 Currency transactions 4, 5 Conceptual
15–7 Harmonization around the world 3 Mechanical, conceptual
15–8 Foreign Corrupt Practices Act 8 Conceptual

15–1 Exporting decisions 4, 5 Mechanical, analytical
15–2 Currency transactions 1, 4, 5, 6 Mechanical, conceptual,
15–3 Exchange rates and income effects 4, 5, 6, 7 Mechanical, analytical
15–4 Foreign production decisions 3, 4 Mechanical, analytical
15–5 Global trade agreements 2, 7 Conceptual, analytical
15–6 Currency fluctuations 1, 4, 5, 6 Mechanical, conceptual
15–7 Tootsie Roll’s globalization 1, 2, 6, 7 Mechanical, conceptual, real

15–1 Globalization activities 1, 2 Conceptual
15–2 International accounting standards 2, 3, 5 Conceptual

Business Week
15–3 Business Week assignment: Inside Japan 2, 3 Conceptual, real, writing,
group assignment

15–1 U.S. foreign trade zones 1, 2, 7 Conceptual

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 1
Below are brief descriptions of each problem, case, and the first Internet assignment. 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.

15–1 Cramer 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 Europa-West 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 that would protect the
company from losses from exchange rate fluctuations.

15–3 Wallerton, 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 Ulsa 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 Global Trade Agreements 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 Wolfe Computer 40 Strong

A more comprehensive problem involving gains and losses on both
receivables and payables stated in foreign currencies. Student is also asked to
explain techniques for hedging against losses on foreign payments and foreign

15–7 Tootsie Roll’s Globalization 35 Medium

This problem demonstrates how the financial statements of a company
(Tootsie Roll Industries, Inc.) can be used to assess its level of globalization.
By evaluating the number of countries with operations; the percentage of
sales, assets and earnings from foreign sources; and the foreign taxes paid, an
investor can form an opinion about a firm’s level of globalization.

2 © The McGraw-Hill Companies, Inc., 2005

15–1 Bristow, Inc. 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.

15–2 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.

Business Week Assignment

15–3 Business Week Assignment: Inside Japan 70 Strong
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.

Internet Assignment
15–1 U.S. Foreign Trade Zones 40 Medium
Using the Web site, the student is asked to find information concerning
foreign trade zones located in their home state. The student is also asked to
read one of the several case studies included in the site and answer follow-up

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 3
1. Different accounting standards have been developed in various countries because of differences in:
• Legal and political systems
• Economic environments
• Levels of stability of the currency
2. 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 wide-scale application of its standards because it has no
enforcement power.
3. a. $1,156,000 = (£800,000 × $1.4450 per British pound)
b. $2,674 = (¥350,000 × $.00764 per yen)
c. $44,745 = (€50,000 × $.8949 per euro)
4. a. The U.S. company will determine the dollar cost of this purchase by translating 2 million pounds
into the equivalent value in U.S. dollars. This is done by multiplying the foreign currency amount
by the foreign exchange rate, stated in U.S. dollars, in effect at the date of the transaction.
b. The conversion of one currency to another is handled by banks in an international currency
exchange. The U.S. company can pay the debt in dollars through its bank. The bank will use these
dollars to purchase the needed foreign currency (pounds) and will arrange delivery of this currency
to the foreign company’s bank.
5. 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 direction in 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.
6. a. 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, the company’s foreign accounts receivable will
become equivalent to an increasing number of U.S. dollars.
b. 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 dollars in order to purchase the foreign currency needed to pay off its foreign accounts
c. A company that sets its sales prices in U.S. dollars will not have its receivables affected by
fluctuations in foreign exchange rates. These fluctuations will affect the amounts of foreign
currency that the company’s foreign customers must pay for their purchases, but they will not
affect the number of dollars that the U.S. company receives. However, an increase in foreign
exchange rates may cause a U.S. company’s sales to rise as U.S. prices may become “cheaper” to
foreign buyers.
7. 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 U.S. dollars, thus experiencing
gains from the exchange rate fluctuations.

4 © The McGraw-Hill Companies, Inc., 2005

8. CompuTech should experience primarily gains as a result of the strong U.S. dollar. The phrase “the
U.S. dollar has risen against most foreign currencies” is equivalent to saying that most foreign
exchange rates have fallen when stated in U.S. dollars. As CompuTech has accounts payable in foreign
currencies, it will experience gains from declines in foreign exchange rates.
9. Two ways in which a company that makes purchases on account from foreign companies can protect
itself against the risk of losses from increases in the exchange rate are:
(1) Specify the purchase prices in U.S. dollars.
(2) 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.
10. The globalization of business is a process whereby managers begin to incorporate the impact of
international 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.
11. A firm’s level of globalization determines what types of decisions and strategies it must consider to
compete effectively. Management accountants must understand the firm’s level of globalization in
order to know what types of international information is needed to aid in the firms’ decision making
12. 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.
13. Current exchange rates can be obtained from sources such as the Wall Street journal or within the
business section of most local newspapers. In addition, numerous Web sites with current exchange rate
data can be located by searching under the keywords “foreign currency” or “exchange rates.” Two
examples are:
14. 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.
15. 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), Robert Herz (U.S.), James Leisenring (U.S.), Warren McGregor (Australia), Tricia O’Malley
(Canada), Harry Schmid (Switzerland), Geoffrey Wittington (U.K.), and Tatsuni Yamada (Japan).
Indonesia does not have a well-developed capital market.
16. 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

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 5
17. 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.
18. 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.
19. The French furniture maker bears the (transaction) risk of exchange rate gains and losses since it must
obtain U.S. dollars.
20. 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.
21. 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.

6 © The McGraw-Hill Companies, Inc., 2005


Ex. 15–1 a. None (this describes an exchange rate)

b. Exporting
c. International licensing
d. Foreign Corrupt Practices Act
e. Hedging
f. None (this describes a market economy)
g. International Accounting Standards Board.

Ex. 15–2 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 firm’s annual report(s)
or locating articles concerning the firm contained in business periodicals or newspapers.

Ex. 15–3 The following answers are provided using exchange rates from April 2003. Student
responses will vary depending on current exchange rates.
a. 15,000 euros = $16,275.48
b. 7,000 Brazilian reais = $2,279.50
c. $3,000 = 23,099 South African rand
d. 150 euros = 224.92 Swiss francs

Ex. 15–4 The World Fact Book can be located at:
Indonesia’s primary imports and exports are manufactured goods, followed by fuels
(exports) and raw materials (imports). The labor force numbers approximately 99 million
with a high percentage being literate (over 80%). Most of the labor force is engaged in
agricultural occupations (45%); 11% in industry and 39% in services. Communication
and transportation networks are adequate, but not as extensive as in a fully developed
country. The government has been trying to encourage “free market” efforts by following
a policy of continued de-regulation. Firms considering locating there must take into
account the possibility of political unrest.

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 7
Ex. 15–5 a. Weak dollar. Companies that export United States-made products benefit from a weak
dollar, because the higher foreign exchange rates make U.S. goods less expensive for
foreign customers.

b. Strong dollar. A strong dollar means low foreign exchange rates, which, in turn, make
foreign goods less expensive for U.S. customers.

c. Strong dollar. A strong dollar (low foreign exchange rates) makes foreign-made goods
less expensive to U.S. consumers. Therefore, Japanese imports such as Toyotas are
more competitive with U.S. products when the dollar is strong.

d. Weak dollar. A weak dollar (high foreign exchange rates) makes U.S. products less
expensive to customers who buy these products using a foreign currency. Therefore,
U.S. products such as Caterpillar tractors will sell better in foreign countries when the
dollar is “weak.”

e. Strong dollar. A strong U.S. dollar allows U.S. tourists traveling abroad to buy more
foreign currency and, therefore, more goods and services in foreign countries.

f. Weak dollar. Even though this small store has no receivables or payables stated in for-
eign currency, it still competes with stores selling foreign-made products. A “weak”
dollar raises the price of foreign goods to U.S. consumers, thereby making the foreign
goods less competitive with United States-made products.

Ex. 15–6
Type of Credit Currency Used in Exchange Effect
Transaction Contract Rate Direction on Income
Case 1 2 3 4
a Sales Foreign currency Falling Loss
b Purchases U.S. dollars Rising No effect
c Purchases Foreign currency Rising Loss
d Sales U.S. dollars Falling No effect
e Purchases Foreign currency Falling Gain

8 © The McGraw-Hill Companies, Inc., 2005

Ex. 15–7 a. There are many countries listed on the website from which students can choose. Some
examples are El Salvador, Singapore, and Malaysia.

b. Again, there are many countries that do not allow only IFRS financial reports.
Examples are U.S., China, Russia, and Bolivia.

c. The European Commission, on February 13, 2001, proposed a Regulation that would
require all companies listed on a regulated market to use International Financial
Reporting Standards (IFRS) by 2005. The Commission supported their proposal with
the following language: “The Regulation would help eliminate barriers to cross-border
trading in securities by ensuring that company accounts throughout the EU are more
transparent and can be more easily compared. This would in turn increase market
efficiency and reduce the cost of capital for companies."”(see under
“Other IASB-Related News”)

Ex. 15–8 Under the amended Foreign Corrupt Practices Act, only activity c would be considered
illegal since it is intended to help the firm garner business it may not otherwise obtain.
Activities a, b and d would be considered facilitating payments as these are intended to
speed up the provision of government services (a and d) or result in a higher level of
services (b).

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 9
30 Minutes, Medium PROBLEM 15–1

a. Profit if sold in the U.S.:

Total sales revenue in Danish kroner ($5,200 × 6.80 kroner/dollar*)................................. 35,360
Materials and labor costs ........................................................................................................ (8,500)
Shipping costs in kroner ($3,000 × 6.80 kroner/dollar)........................................................ (20,400)
Misc. costs in kroner ($400 × 6.80 kroner/dollar)................................................................. (2,720)
Profit in kroner .................................................................................................................... 3,740
*1 ÷ 0.147

b. Profit if sold in Great Britain:

Total sales revenue in Danish kroner (2,800 pounds × 11.36 kroner/pound*)................... 31,808
Materials and labor costs ........................................................................................................ (8,500)
Shipping costs in kroner ($2,000 × 6.80 kroner/dollar)........................................................ (13,600)
Misc. costs in kroner (480 pounds × 11.36 kroner/pound)................................................... (5,453)
Profit in kroner .................................................................................................................... 4,255
*1 ÷ 0.088

c. 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.

10 © The McGraw-Hill Companies, Inc., 2005

25 Minutes, Easy PROBLEM 15–2
General Journal

Nov 12 Inventory 1 4 0 5 0 0 0
Accounts Payable (Stockholm Motors) 1 4 0 5 0 0 0
To record purchase of automobiles from Stockholm
Motors for SK20,000,000 when exchange rate is $.07025
per krona (SK20,000,000 × $.07025 = $1,405,000).

Dec 31 Loss on Fluctuations in Foreign Exchange Rates 2 4 4 0 0

Accounts Payable (Stockholm Motors) 2 4 4 0 0
To adjust balance of SK20,000,000 account payable
to amount indicated by year-end exchange rate:
Original account balance $1,405,000
Adjusted balance (SK20,000,000 × $.07147) 1,429,400
Required ( $ 24,400 )

Jan 11 Accounts Payable (Stockholm Motors) 1 4 2 9 4 0 0

Cash 1 4 2 1 4 0 0
Gain on Fluctuations in Foreign Exchange Rates 8 0 0 0
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 $1,429,400
Amount paid, Jan. 11 1,421,400
Gain from decline in exchange rate $ 8,000

b. Computation of exchange rate on Jan. 11:

Amount paid, $1,421,400, divided by liability in Swedish kronor, SK20,000,000 = exchange rate,
$.07107 per krona.

c. On November 12, Europa-West could have purchased 60-day future contracts on 20 million
kronor. These future contracts would have created a krona receivable of the same size as the
company’s krona payable to Stockholm Motors. Any gain or loss on the payable as a result of
exchange rate fluctuations would then have been offset by a corresponding loss or gain on the
future contracts.

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 11
40 Minutes, Strong PROBLEM 15–3

a. Complete the following ProForma Income Statements:

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

(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
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, Wallerton’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).

12 © The McGraw-Hill Companies, Inc., 2005

40 Minutes, Medium PROBLEM 15–4

a. Malaysia Malta
Sales revenue per unit .................................................................... 645.00 Ringgits 70.00 Lira
Cost of components......................................................................... (215.00) (20.00)
Import duties (.05 × 215; .15 × 20) ................................................ (10.75) (3.00)
Assembly costs ................................................................................ (200.00) (25.00)
Pretax profit per unit ..................................................................... 219.25 22.00
Income tax per unit (20%; 10%)................................................... ( 43.85) (2.20)
Profit per unit ................................................................................. 175.40 Ringgits 19.80 Lira

b. Profit per unit in dollars (175.40 ringgits × .23 dollars/ringgit;

19.80 lira × 2.5 dollars/lira) ......................................................... $40.34 $49.50
The highest profits per unit will be earned by assembling and selling product Y in Malta.

c. Total profit in dollars

($40.34 × 12,000 units; $49.50 × 8,000 units).............................. $484,080 $396,000
On a total profit basis, the highest total profits will be earned by assembling and selling product Y
in Malaysia.

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 13
90 Minutes, Strong PROBLEM 15–5

Answers to this assignment will vary depending on the trade agreement chosen to be compared with
NAFTA. Information on various trade agreements can be located on the Internet by typing the key
words “international trade agreements” or by accessing the web site for the U.S.
International Trade Administration.

14 © The McGraw-Hill Companies, Inc., 2005

40 Minutes, Strong PROBLEM 15–6
General Journal

Oct 28 Inventory of Raw Materials 1 8 9 0 0 0 0

Accounts Payable (Mitsutonka) 1 8 9 0 0 0 0
To record purchase of 20,000 disk drives from
Mitsutonka for ¥180,000,000 due in 30 days. Exchange
rate, $.0105 (¥180,000,000 × $.0105 = $1,890,000).

Nov 9 Accounts Receivable (Bank of England) 9 9 7 4 2 5

Cost of Goods Sold 5 1 8 0 0 0
Inventory of Finished Goods 5 1 8 0 0 0
Sales 9 9 7 4 2 5
To record sale of 700 computers to Bank of England
for £604,500, due in 30 days. Exchange rate $1.65
(£604,500 × $1.65 = $997,425).

27 Accounts Payable (Mitsutonka) 1 8 9 0 0 0 0

Gain on Fluctuations in Foreign Exchange Rates 5 4 0 0 0
Cash 1 8 3 6 0 0 0
To record payment of ¥180,000,000 liability to
Mitsutonka and to recognize gain from decline in
exchange rate:
Original account balance $1,890,000
Amount paid 1,836,000
Gain from decline in exchange rate $ 54,000

Dec 2 Inventory of Raw Materials 8 4 3 6 0 0

Accounts Payable (German Optical) 8 4 3 6 0 0
To record purchase of 10,000 monitors from German
Optical for €1,200,000, due in 60 days. Exchange
rate, $.7030 (€1,200,000 × $.7030 = $843,600).

9 Cash 9 8 5 3 3 5
Loss on Fluctuations in Foreign Exchange Rates 1 2 0 9 0
Accounts Receivable (Bank of England) 9 9 7 4 2 5
Collected £604,500 receivable from Bank of England
when exchange rate was $1.63 per British pound:
Original receivable $997,425
Amount collected (£604,500 × $1.63) 985,335
Loss from fall in exchange rate $ 12,090

11 Accounts Receivable (Computique) 14 2 5 0 0 0 0

Cost of Goods Sold 7 4 0 0 0 0 0
Inventory of Finished Goods 7 4 0 0 0 0 0
Sales 14 2 5 0 0 0 0
To record sale of 10,000 computers to Computique for
SwF23,750,000, due in 30 days. Exchange rate $.6000
per franc (SwF23,750,000 × $.6000 = $14,250,000).

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 15
WOLFE COMPUTER (concluded)
General Journal

b. Adjusting Entries
Dec 31 Accounts Payable (German Optical) 3 6 0 0
Gain on Fluctuations in Foreign Exchange Rates 3 6 0 0
To adjust balance of €1,200,000 liability to German
Optical to amount indicated by year-end exchange rate:
Original account balance $843,600
Adjusted balance (€1,200,000 × $.7000) 840,000
Required adjustment (gain) $ 3,600

Dec 31 Loss on Fluctuations in Foreign Exchange Rates 4 7 5 0 0

Accounts Receivable (Computique) 4 7 5 0 0
To adjust balance of SwF23,750,000 receivable from
Computique to amount indicated by year-end exchange
Original $14,250,000
Adjusted balance (SwF23,750,000 ×
$.5980) 14,202,500
Required adjustment (loss) $ 47,500

c. Computation of unit sales price:

Sales price, 700 units, in British pounds £ 6 0 4 5 0 0
Sales price, 700 units, in U.S. dollars
(£604,500 × $1.65 per pound) $ 9 9 7 4 2 5
Sales price per unit ($997,425 ÷ 700 units) $ 1 4 2 5

Alternative computation, using sale in francs:

Sales price, 10,000 units, in Swiss francs SwF23 7 5 0 0 0 0
Sales price in U.S. dollars (SwF23,750,000 ×
$.6000 per franc) $14 2 5 0 0 0 0
Sales price per unit ($14,250,000 ÷ 10,000 units) $ 1 4 2 5

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

Amount paid, $1,836,000, divided by liability in yen,
¥180,000,000, equals exchange rate, $.0102 per yen.

e. (1) 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 offset by a counterbalancing loss or gain
on the future contract.
(2) Wolfe’s 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

16 © The McGraw-Hill Companies, Inc., 2005

35 Minutes, Medium PROBLEM 15–7
a. Tootsie Roll has subsidiaries in Mexico and Canada. Tootsie Roll also exports its products to
several countries.

b. Percentages of foreign assets, sales and earnings increased between 2002 to 2001 as the following
table shows:

2002 2001
Net Assets 2.85% 3.72%
($14,997/$526,740) ($18,909/$508,461)
Sales 6.93% 7.52%
($27,265/$393,185) ($29,465/$391,755)
Net Earnings 1.47% .483%
($975/$66,388) ($317/$65,687)

c. Management states in its discussion of operations that the Canadian subsidiary reported increased
sales in 2002 while sales in Mexico declined (see p. 6).

d. Foreign currency translations negatively impacted comprehensive income (Note 11, page 8) in
2002 ($1,533,000) but positively impacted earnings in 2001 by $846,000. There is some evidence
that Tootsie Roll uses formal hedging techniques such as purchasing futures contracts to lower
their currency exchange risk (see Note 1, p. 13).

e. According to note 4 in 2002, Tootsie Roll paid $553/$34,379 = 1.61% of current taxes to foreign

f. Tootsie Roll is not a multinational company. Tootsie Roll’s management has started on a path of
globalization, which includes exporting and Canadian and Mexican (North American)
manufacturing operations. However the percentage of sales and earnings generated from
international operations is very small compared to truly multinational companies.

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 17
40 Minutes, Medium CASE 15–1

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 firm’s 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 great 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 facility’s existing technology. Bristow would need to do an extensive
analysis of this option to determine if the return on the investment in the subsidiary would be satisfac-
tory. 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 Bristow’s 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 Bristow’s customers
in the U.S.
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 oper-
ations in other foreign locations, Kale will likely be familiar with the complexities of doing business in
other countries. Bristow’s managers would have an opportunity to learn from Kale, allowing Bristow
to more easily establish foreign operations in the future.

18 © The McGraw-Hill Companies, Inc., 2005

50 Minutes, Medium CASE 15–2

Student opinions will vary on the topic. Interesting background information can be located by
browsing the IOSCO web site at:

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 19
70 Minutes, Strong CASE 15–3

a. The following environmental variables may be discussed by students.

1. Legal and Political:
• The accounting rules are created by the Ministry of Finance and the Ministry of Finance
also overseas tax rules, bank rules and securities market rules. Because accounting
standards are not created by the accounting profession, it has less power and control than
in other countries where the profession does create standards.
2. Economic:
• The industrial organization in Japan is based on keiretsu. The keiretsu includes a bank
that funds many of the projects of the group of companies in the keiretsu.
• Because most funding comes from banks, the financial accounting disclosure levels in
Japan have historically been lower than in the U.S. and the need for auditors is lower.
• The keiretsu organization also encourages company members of the keiretsu to cross hold
each other’s stocks. These cross holdings are not typically clearly identified on the
financial statements.
• Finally, a much lower percent of the general Japanese population holds stock. Savings and
investments are typically done at banks. As a result, there is much lower investor demand
for accounting disclosures.
3. Culture:
• Japan is a collectivist society that is risk averse and respects authority. One result is the
country is slow to change because of a need for consensus. In addition, financial reporting
tends to be less transparent than in the U.S. or the U.K.
4. Infrastructure:
• The number of accountants in Japan is very small compared to the U.S.
• Japan is a highly literate society.

b. There is a lot of evidence that Japanese standards are shifting to U.S. standards. The so-called
1999 “accounting big bang” is discussed in the chapter and referred to in the article. Also a
consortium of the largest Japanese businesses announced in August of 2001 that they were
creating a Japanese Accounting Standards Board to create new financial accounting standards.
This board has been admitted to membership by the IASB. However, at the time of writing this,
the newly created Japanese Board has not been recognized by the Japanese Ministry of Finance as
the primary accounting standard setter for Japan.

20 © The McGraw-Hill Companies, Inc., 2005

40 Minutes, Medium INTERNET 15–1

The National Association of Foreign Trade Zones home page is located at:
Answers to parts a through c can be located by clicking on the icon: FTZ.
a. Legally, a Foreign-Trade Zone (FTZ) is an area within the United States that the Government
considers outside the country, or at least, outside of the U.S. Customs territory. Certain types of
merchandise can be imported into a Zone without going through formal Customs entry
procedures or paying import duties.

A Subzone is a special-purpose zone established as part of a zone project for a limited purpose
that cannot be accommodated within an existing general-purpose zone. Subzones must be
sponsored by the grantee of a general-purpose zone.

b. The answers will differ depending on the state. The activities that can occur in a foreign trade
zone include the following:

Assembled Repackaged Cleaned

Tested Destroyed Stored
Sampled Mixed Salvaged
Relabeled Manipulated Processed

c. The answers to the request for other information are below:

1. The website describes the creation of FTZs as follows:
Applications for foreign trade zones are submitted to the Foreign Trade Zones Board Staff
within the Import Administration of the Department of Commerce. The application submitted
to the Board must provide extensive information on the proposed zone project. Customarily,
applicants are state or local government entities, port or airport authorities, economic
development agencies or not-for-profit corporations. If the application is approved, the
recipient is then known as the grantee. If a private corporation seeking zone benefits requests
subzone status, the application is submitted by the grantee of the foreign trade zone on behalf
of that company.

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 21
2. The following companies are listed on the website as using FTZs:

ATOFINA Petrochemicals, Inc. BMW Manufacturing Corp.

Caterpillar, Inc. Conair Corporation
Conoco, Inc. Eastman Kodak
General Electric Company JVC America, Inc.
Kawasaki Motors Manufacturing Corp. Motica Enterprises LLC
Northrop Grumman The Premcor Refining Group
Tosco Refining Company Wyeth Nutritionals, Inc.
Xerox Corporation

3. The following benefits are listed on the website:

Ten Ways Your Company Can Benefit From Using a Foreign Trade Zone
1. Imports may be admitted and held in a foreign trade zone without paying U.S. Customs
2. FTZ users can pay the duty rate on component material or merchandise produced from
component material, whichever is lower.
3. Customs duties are never paid on merchandise exported from a zone.
4. Duties are reduced or eliminated on materials subject to defect, damage, obsolescence,
waste or scrap.
5. Merchandise may be exported and returned to an FTZ without duty payment.
6. Spare parts may be stored, returned, or destroyed without duty payment.
7. Delays in Customs clearances and duty drawback are eliminated.
8. Duties are not owed on labor, overhead, or profit attributed to FTZ production operations.
9. Quality control inspections can identify substandard goods to be destroyed or returned
without duty payment.
10. No duty is owed on in-bound, zone-to-zone transfer of FTZ merchandise.

22 © The McGraw-Hill Companies, Inc., 2005