Problem 1 - Gains and Losses Journalizing Exchange Rate
Global Motors is a U.S. corporation that purchases automobiles from European manufacturers for distribution in the United States. A recent purchase involved the following events:
Nov. 12 Purchased automobiles from Stockholm Motors in Swedish kronor for Sk20,000,000, payable in 60 days. Current exchange rate, $0.1286 per krona. (Global uses the perpetual inventory system.)
Dec. 31 Made year-end adjusting entry relating to the Sk20,000,000 account payable to Stockholm Motors. Current exchange rate, $0.1288 per krona.
Jan. 11 Issued a check to World Bank for $2,566,800 in full payment of the account payable to Stockholm Motors.
Instructions -
a. Prepare in general journal form the entries necessary to record the preceding events.
b. Compute the exchange rate (price) of the krona in U.S. dollars on January 11.
c. Explain a hedging technique that Global Motors might have used to protect itself from the possibility of losses resulting from a significant increase in the exchange rate for the krona.
Problem 2 - Exchange Rates and Production Decisions
Ulsa Company has manufacturing subsidiaries in Malaysia and Malta. It is considering shipping the subcomponents of Product Y to one or the other of these countries for final assembly. The final product will be sold in the country where it is assembled. Other information is as follows:
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Malaysia
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Malta
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Average exchange rate
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$1=4.30 ringgits
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$1=0.40 lira
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Import duty
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5%
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15%
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Income tax rate
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20%
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10%
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Unit selling price of Product Y
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645 ringgits
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70 liri
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Price of subcomponent
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215 ringgits
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20 liri
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Final assembly costs
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200 ringgits
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25 liri
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Number of units to be sold
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12,000 units
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8,000 units
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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.
b. In which country would the highest profit per unit (in dollars) be earned?
c. In which country would the highest total profit (in dollars) be earned?