Chapter 18

International Issues in Management Accounting

MULTIPLE CHOICE

1. What should the management accountant do in the global business environment?

a. stay current in a variety of business areas
b. familiarize himself/herself with the accounting rules of the countries in which the firm
operates
c. acquire good training and education and stay abreast of changes in the accounting field
d. all of the above
ANS: D DIF: 2 REF: p. 818
OBJ: 1 NAT: AACSB Reflective thinking | IMA Global business

2. A multinational corporation is a corporation that

a. imports raw materials from other nations
b. exports finished goods to other nations
c. produces goods in a foreign trade zone
d. engages in any of the above activities
ANS: D DIF: 1 REF: p. 818
OBJ: 2 NAT: AACSB Reflective thinking | IMA Global business

3. The tariff levied on imported goods by the federal government is recorded as

a. delivery cost
b. raw material cost
c. selling and administrative cost
d. income taxes
ANS: B DIF: 2 REF: p. 819
OBJ: 2 NAT: AACSB Reflective thinking | IMA Global business

4. How can a company reduce tariffs on imported goods?

a. restrict the amount of imported materials
b. alter the materials by adding U.S. resources
c. utilize foreign trade zones
d. all of the above
ANS: D DIF: 2 REF: p. 819
OBJ: 2 NAT: AACSB Reflective thinking | IMA Global business

5. Which of the following benefits are available to a company located in a foreign trade zone?
a. can avoid duty payments
b. can assemble high tariff parts into a lower tariff product
c. allows the importation and use of substandard materials
d. all of the above
ANS: D DIF: 2 REF: p. 819
OBJ: 2 NAT: AACSB Reflective thinking | IMA Global business

1
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2 Managerial Accounting
6. At what point must a company pay duty on goods leaving a foreign trade zone?
a. at point of entry into the U.S.
b. at point of departure from the foreign trade zone
c. at any time the U.S. government demands payment
d. never because goods in a foreign trade zone are duty free
ANS: B DIF: 2 REF: p. 819-820
OBJ: 2 NAT: AACSB Reflective thinking | IMA Global business

7. Exporting products is more complicated for the management then selling products domestically
because
a. foreign countries have various import and tariff regulations
b. there are foreign currency transaction risks
c. both a and b
d. none of the above
ANS: C DIF: 2 REF: p. 820
OBJ: 2 NAT: AACSB Reflective thinking | IMA Global business

Figure 18-1

Imports, Ltd., imports merchandise that it resells in the United States. Inventory shrinkage due to
breakage is about 5 percent of the total. The average tariff rate on the imports is 20 percent, and the
company's carrying cost is 12 percent.

The average shipment is $400,000, and inventory is stored an average of three months before it is
moved from the warehouse in the foreign trade zone. The company averages four shipments a year.

8. Refer to Figure 18-1. If Imports, Ltd., is located in a foreign trade zone, total tariff and tariff-related
costs per year associated with the imports would be
a. $304,000
b. $313,120
c. $324,000
d. $329,600
ANS: A
SUPPORTING CALCULATIONS:

Tariff and tariff-related costs per shipment = $400,000 ´ 95% ´ 20% = $76,000

$76,000 ´ 4 shipments per year = $304,000

DIF: 2 REF: p. 820 OBJ: 2

NAT: AACSB Analytic | IMA Global business

9. Refer to Figure 18-1. If Imports, Ltd., is NOT located in a foreign trade zone, total tariff and tariff-
related costs per year associated with the imports would be
a. $324,000
b. $313,120
c. $304,000
d. $329,600

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 Chapter 18/International Issues in Management Accounting 3

ANS: D
SUPPORTING CALCULATIONS:

Tariff and tariff-related costs per shipment =

($400,000 ´ 20%) + ($400,000 ´ 20% ´ 12% ´ 3/12) = $82,400

$82,400 ´ 4 shipments per year = $329,600

DIF: 2 REF: p. 820 OBJ: 2

NAT: AACSB Analytic | IMA Global business

Figure 18-2

Pier Seven, Ltd., imports merchandise that it resells in the United States. Inventory shrinkage due to
breakage is about 8 percent of the total. The average tariff rate on the imports is 15 percent, and the
company's carrying cost is 10 percent.

The average shipment is $150,000, and inventory is stored an average of four months before it is
moved from the warehouse in the foreign trade zone. The company averages three shipments per
year.

10. Refer to Figure 18-2. If Pier Seven, Ltd., is located in a foreign trade zone, total tariff and tariff-
related costs per year associated with the imports would be
a. $67,500
b. $62,100
c. $20,700
d. $22,500
ANS: B
SUPPORTING CALCULATIONS:

Tariff and tariff-related costs per shipment = $150,000 ´ 92% ´ 15% = $20,700

$20,700 ´ 3 shipments per year = $62,100

DIF: 2 REF: p. 820 OBJ: 2

NAT: AACSB Analytic | IMA Global business

11. Refer to Figure 18-2. If Pier Seven, Ltd., is NOT located in a foreign trade zone, total tariff and
tariff-related costs per year associated with the imports would be
a. $69,750
b. $67,500
c. $73,500
d. None of the above

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4 Managerial Accounting

ANS: A
SUPPORTING CALCULATIONS:

Tariff and tariff-related costs per shipment =

($150,000 ´ 15%) + ($150,000 ´ 15% ´ 10% ´ 4/12) = $22,500 + $750 = $23,250
$23,250 ´ 3 shipments per year = $69,750

DIF: 2 REF: p. 820 OBJ: 2

NAT: AACSB Analytic | IMA Global business

Figure 18-3

Merit, Ltd., imports merchandise that it resells in the United States. The merchandise is stored in a
company warehouse that is located in a foreign trade zone. Inventory shrinkage due to breakage is
about 4 percent of the total. The average tariff rate on the imports is 18 percent, and the company's
carrying cost is 9 percent.

The average shipment is $400,000, and inventory is stored an average of four months before it is
moved from the warehouse in the foreign trade zone.

12. Refer to Figure 18-3. If Merit uses a foreign trade zone, total tariff and tariff-related costs per year
associated with the imports would be
a. $207,360
b. $209,424
c. $218,610
d. $239,409
ANS: A
SUPPORTING CALCULATIONS:

Tariff and tariff-related costs per shipment = $400,000 ´ 96% ´ 18% = $69,120

$69,120 ´ 3 shipments per year = $207,360

DIF: 2 REF: p. 820 OBJ: 2

NAT: AACSB Analytic | IMA Global business

13. Refer to Figure 18-3. If Merit does NOT use a foreign trade zone, total tariff and tariff-related costs
per year associated with the imports would be
a. $212,896
b. $222,480
c. $228,638
d. $242,560

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 Chapter 18/International Issues in Management Accounting 5

ANS: B
SUPPORTING CALCULATIONS:

Tariff and tariff-related costs per shipment =

($400,000 ´ 18%) + ($400,000 ´ 18% ´ 9% ´ 4/12) = $74,160

$74,160 ´ 3 shipments per year = $222,480

DIF: 2 REF: p. 820 OBJ: 2

NAT: AACSB Analytic | IMA Global business

Figure 18-4

KA Petro and DJ Petro both operate petrochemical plants. KA Petro is located in a foreign trade
zone, whereas DJ Petro is located several miles from the foreign trade zone. Both companies import
crude oil for use in production. The cost of the crude oil averages $500,000. Duty is assessed at 8%
of cost. About 25% of the oil is lost through evaporation during production. DJ Petro has carrying
costs associated with the duty payment of 10% per year times the portion of the year that oil is
inventory. Both companies typically incur carrying costs for 6 months.

14. Refer to Figure 18-4. Calculate the total duty and duty-related costs for KA Petro.
a. $30,000
b. $42,000
c. $40,000
d. $2,000
e. $0
ANS: A
KA Petro DJ Petro
Duty paid at purchase 40,000
Carrying costs of duty 0 2,000
Duty paid at sale 30,000
Total duty and duty-related costs 30,000 42,000

KA Petro incurs costs at time of sale. ($500,000 ´ 75%) ´ 8%

DIF: 2 REF: p. 820 OBJ: 2

NAT: AACSB Analytic | IMA Global business

15. Refer to Figure 18-4. Calculate the total duty and duty-related costs for DJ Petro.
a. $30,000
b. $42,000
c. $40,000
d. $2,000
e. $0
ANS: B
KA Petro DJ Petro
Duty paid at purchase 40,000
Carrying costs of duty 0 2,000

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6 Managerial Accounting

Duty paid at sale 30,000

Total duty and duty-related costs 30,000 42,000

DJ Petro incurs costs at time of purchase. ($500,000 ´ 8%) + [($500,000 ´ 8%) ´ 10% ´ 6/12]

DIF: 2 REF: p. 820 OBJ: 2

NAT: AACSB Analytic | IMA Global business

16. Refer to Figure 18-4. Calculate the duty-related costs for DJ Petro.
a. $30,000
b. $42,000
c. $40,000
d. $2,000
e. $0
ANS: D
KA Petro DJ Petro
Duty paid at purchase 40,000
Carrying costs of duty 0 2,000
Duty paid at sale 30,000
Total duty and duty-related costs 30,000 42,000

[($500,000 ´ 8%) ´ 10% ´ 6/12]

DIF: 2 REF: p. 820 OBJ: 2

NAT: AACSB Analytic | IMA Global business

17. Refer to Figure 18-4. Calculate the duty-related costs for KA Petro.
a. $30,000
b. $42,000
c. $40,000
d. $2,000
e. $0
ANS: E
KA Petro DJ Petro
Duty paid at purchase 40,000
Carrying costs of duty 0 2,000
Duty paid at sale 30,000
Total duty and duty-related costs 30,000 42,000

DIF: 2 REF: p. 820 OBJ: 2

NAT: AACSB Analytic | IMA Global business

18. Which of the following statements is not true concerning exporting?

a. Exporting is the sale of a company’s products in foreign countries.
b. In order to export, it is necessary to have a production facility in the foreign country.
c. Foreign countries have a variety of import and tariff regulations.
d. A U.S. company may choose to work with an experienced distributor familiar with the

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 Chapter 18/International Issues in Management Accounting 7
legal complexities of other countries.
ANS: B DIF: 3 REF: p. 820
OBJ: 2 NAT: AACSB Analytic | IMA Global business

19. NAFTA includes which countries?

a. United States and Canada
b. United States, Canada, and Mexico
c. United States, Canada, Mexico, and Brazil
d. United States and Mexico
ANS: B DIF: 2 REF: p. 821
OBJ: 2 NAT: AACSB Reflective thinking | IMA Global business

20. What is a certificate of origin?

a. a document summarizing information concerning imported goods and the country of
origin
b. a document summarizing the information enabling companies to qualify for reduced
NAFTA duties
c. a document summarizing information concerning exported goods and the country of origin
d. a document summarizing the information concerning NAFTA requirements in the country
of origin
ANS: B DIF: 2 REF: p. 821
OBJ: 2 NAT: AACSB Reflective thinking | IMA Global business

21. Why would a company want to purchase an existing foreign company?

a. It is inexpensive.
b. It is a relatively simple way of expanding.
c. It guarantees success.
d. all of the above
ANS: B DIF: 2 REF: p. 821
OBJ: 2 NAT: AACSB Reflective thinking | IMA Global business

22. A maquiladora is a special example of

a. a wholly owned subsidiary
b. outsourcing
c. a joint venture
d. a foreign trade zone
ANS: C DIF: 2 REF: p. 822
OBJ: 2 NAT: AACSB Reflective thinking | IMA Global business

23. What is a maquiladora?

a. a Mexican company operating in a foreign trade zone
b. a Mexican manufacturing plant operating in Mexico
c. a wholly owned subsidiary of the United States
d. a special importing arrangement with the United States
ANS: B DIF: 2 REF: p. 822
OBJ: 2 NAT: AACSB Reflective thinking | IMA Global business

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8 Managerial Accounting
24. Why would a company enter into a joint venture?
a. Foreign or host countries have restrictive laws on company ownership.
b. The company could gain expertise in other areas.
c. The company could minimize tariffs and costs.
d. all of the above
ANS: D DIF: 3 REF: p. 822
OBJ: 2 NAT: AACSB Reflective thinking | IMA Global business

25. Currency risk management refers to the management of

a. translation risk
b. transaction risk
c. economic risk
d. all of the above
ANS: D DIF: 2 REF: p. 823
OBJ: 3 NAT: AACSB Reflective thinking | IMA Global business

26. Which of the following is the possibility that future cash transactions will be affected by fluctuations
in the exchange rate?
a. Transaction risk
b. Economic risk
c. Translation risk
d. Foreign trade risk
ANS: A DIF: 2 REF: p. 823-824
OBJ: 3 NAT: AACSB Reflective thinking | IMA Global business

27. A $30,000 account receivable to be received in French francs in two months is an example of
a. transaction risk
b. economic risk
c. translation risk
d. none of the above
ANS: A DIF: 2 REF: p. 823-824
OBJ: 3 NAT: AACSB Analytic | IMA Global business

28. A $10,000 account payable to be paid in Japanese yen in three months is an example of
a. transaction risk
b. economic risk
c. translation risk
d. none of the above
ANS: A DIF: 2 REF: p. 823-824
OBJ: 3 NAT: AACSB Analytic | IMA Global business

29. Which of the following is the possibility that a firm's present value of future cash flows will be
affected by exchange rate fluctuations?
a. Accounting risk
b. Economic risk
c. Translation risk
d. Foreign trade risk

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 Chapter 18/International Issues in Management Accounting 9

ANS: B DIF: 1 REF: p. 824

OBJ: 3 NAT: AACSB Reflective thinking | IMA Global business

30. The degree to which a firm's financial statements are exposed to exchange rate fluctuation is referred
to as
a. transaction risk
b. exchange risk
c. financial statement risk
d. translation risk
ANS: D DIF: 1 REF: p. 824
OBJ: 3 NAT: AACSB Reflective thinking | IMA Global business

31. Restating a foreign subsidiary's financial statements in U.S. dollars is an example of

a. transaction risk
b. economic risk
c. translation risk
d. none of the above
ANS: C DIF: 3 REF: p. 824
OBJ: 3 NAT: AACSB Reflective thinking | IMA Global business

32. Less-than-expected demand for a U.S. company's product, due to a strong U.S. dollar relative to
foreign currency, is an example of
a. transaction risk
b. economic risk
c. translation risk
d. none of the above
ANS: B DIF: 3 REF: p. 824
OBJ: 3 NAT: AACSB Reflective thinking | IMA Global business

33. The exchange rate of one currency for another for immediate delivery is the
a. forward rate
b. hedging rate
c. spot rate
d. immediate rate
ANS: C DIF: 3 REF: p. 824
OBJ: 3 NAT: AACSB Reflective thinking | IMA Global business

34. Assume the exchange rate between the United States and Canada changed from $1 U.S. equals
$1.40 Canadian dollars to $1 U.S. equals $1.50 Canadian dollars. This would result in
a. the United States experiencing currency appreciation
b. the United States experiencing currency depreciation
c. exports to Canada tending to increase
d. imports from Canada tending to decrease
ANS: A DIF: 2 REF: p. 824
OBJ: 3 NAT: AACSB Reflective thinking | IMA Global business

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10 Managerial Accounting
35. The Euro has appreciated relative to the U.S. dollar. Which of the following could occur as a result?
a. tourism from the United States could decline
b. tourism from the United States could increase
c. tourism to the United States could decline
d. there would likely be no effect on tourism
ANS: A DIF: 3 REF: p. 824-825
OBJ: 3 NAT: AACSB Reflective thinking | IMA Global business

36. Currency depreciation would bring about

a. increases in imports
b. decreases in exports
c. increases in exports
d. both a and b
ANS: C DIF: 3 REF: p. 825
OBJ: 3 NAT: AACSB Reflective thinking | IMA Global business

37. On February 1, Classic Imports, a U.S. company, received an order from a British customer for
50,000 British pounds to be received in 60 days. If the dollar weakened against the British pound
throughout February and March, Classic Imports would have a(n)
a. exchange gain
b. exchange loss
c. no gain or loss
d. advance pricing agreement
ANS: B DIF: 2 REF: p. 825
OBJ: 3 NAT: AACSB Reflective thinking | IMA Global business

38. Ferguson, Inc., purchased production equipment from a German company, agreeing to pay 100,000
Deutsche marks in one month. If the dollar weakened relative to the Deutsche mark before payment
was made, Ferguson would have a(n)
a. exchange gain
b. exchange loss
c. no gain or loss
d. advance pricing agreement
ANS: B DIF: 2 REF: p. 825
OBJ: 3 NAT: AACSB Reflective thinking | IMA Global business

39. Which of the following is the most common hedging instrument used to insure against gains and
losses on foreign currency exchanges?
a. spot rate contract
b. foreign exchange contract
c. forward exchange contract
d. exposure draft contract
ANS: C DIF: 2 REF: p. 826
OBJ: 3 NAT: AACSB Reflective thinking | IMA Global business

40. When a buyer enters into a hedging contract, what is required?

a. The buyer of the contract must agree to exchange a specified amount of currency at a

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 Chapter 18/International Issues in Management Accounting 11
specified date.
b. The buyer of the contract must agree to deal exclusively with the seller on all future
transactions.
c. The seller of the contract must agree to exchange a specified amount of currency at a
specified date.
d. The seller of the contract must guarantee that the exchange rate will not exceed 10 basis
points.
ANS: A DIF: 3 REF: p. 826
OBJ: 3 NAT: AACSB Reflective thinking | IMA Global business

41. A forward exchange contract is an attempt to manage

a. translation risk
b. transaction risk
c. economic risk
d. none of the above
ANS: B DIF: 3 REF: p. 826
OBJ: 3 NAT: AACSB Reflective thinking | IMA Global business

Figure 18-5

On March 15, Tansy's Tea Shoppe of Tacoma purchased merchandise from a British firm, payable
April 30. The invoice amount totaled 5,000 pounds. On March 15, the rate of exchange of American
dollars for British pounds was .645. On April 30, the exchange rate was .6375.

42. Refer to Figure 18-5. Which of the following statements is true about Tansy's?
a. Tansy's currency has appreciated, and Tansy's has experienced an exchange gain.
b. Tansy's currency has depreciated, and Tansy's has experienced an exchange loss.
c. Tansy's currency has appreciated, and Tansy's has experienced an exchange loss.
d. Tansy's currency has depreciated, and Tansy's has experienced an exchange gain.
ANS: B DIF: 3 REF: p. 825-826
OBJ: 3 NAT: AACSB Reflective thinking | IMA Global business

43. Refer to Figure 18-5. Which of the following statements is true about Tansy's?
a. The exporter's currency has appreciated, and the exporter has experienced an exchange
gain.
b. The exporter's currency has depreciated, and the exporter has experienced an exchange
loss.
c. The exporter's currency has appreciated, and the exporter has experienced an exchange
loss.
d. The exporter's currency has depreciated, and the exporter has experienced an exchange
gain.
ANS: A DIF: 3 REF: p. 825-826
OBJ: 3 NAT: AACSB Reflective thinking | IMA Global business

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12 Managerial Accounting

Figure 18-6

On June 1, Opal, Inc., received an order for goods costing 100,000 Deutsche marks from a German
customer. Payment for the goods is due August 1. The exchange rates for $1 U.S. are as follows:

Exchange Rates
of $1 for Deutsche Marks
Spot rate, June 1 5.60
Forward rate, August 1 5.70
Spot rate, August 1 6.00

44. Refer to Figure 18-6. If Opal does NOT hedge foreign currency transactions, the exchange gain or
loss would be (round to the nearest dollar)
a. $1,190 loss
b. $1,190 gain
c. $313 loss
d. $313 gain
ANS: A
SUPPORTING CALCULATIONS:

Receivable, June 1 (100,000/5.60) $17,857

Received, August 1 (100,000/6.00) 16,667
Exchange loss $ 1,190

DIF: 3 REF: p. 825-826 OBJ: 3

NAT: AACSB Analytic | IMA Global business

45. Refer to Figure 18-6. If Opal's policy is to hedge foreign currency transactions, the exchange gain or
loss would be (round to the nearest dollar)
a. $1,190 gain
b. $1,190 loss
c. $313 gain
d. $313 loss
ANS: D
SUPPORTING CALCULATIONS:

Receivable, June 1 (100,000/5.60) $17,857

Forward contract (100,000/5.70) 17,544
Exchange loss $ 313

DIF: 3 REF: p. 825-826 OBJ: 3

NAT: AACSB Analytic | IMA Global business

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resold, copied, or distributed without the prior consent of the publisher.
 Chapter 18/International Issues in Management Accounting 13
46. On April 1, Sampson, Inc., received an order from a Japanese customer for 220,000 yen to be paid
on receipt of the goods scheduled for June 1. On June 1, Sampson received the Japanese customer's
payment and recorded an exchange loss of $200.

If the exchange rate on April 1 was $1 U.S. for 100 yen, the exchange rate for $1 U.S. on June 1
must have been
a. 92 yen
b. 98 yen
c. 100 yen
d. 110 yen
ANS: D
SUPPORTING CALCULATIONS:

Receivable, April 1 (220,000/100) $2,200

Less: Exchange loss 200
Amount received, June 1 $2,000

220,000/$2,000 = 110 yen

DIF: 3 REF: p. 825-826 OBJ: 3

NAT: AACSB Reflective thinking | IMA Global business

Figure 18-7

On September 1, Coral, Inc., received an order for goods costing 80,000 yen from a Japanese
customer. Payment for the goods is due November 1. The exchange rates for $1 U.S. are as follows:

Exchange Rates
of $1 for Yen
Spot rate, September 1 108
Forward rate, November 1 109
Spot rate, November 1 114

47. Refer to Figure 18-7. If Coral does NOT hedge foreign currency transactions, the exchange gain or
loss would be (round to the nearest dollar)
a. $6 gain
b. $32 loss
c. $39 gain
d. $39 loss
ANS: D
SUPPORTING CALCULATIONS:

Receivable, September 1 (80,000/108) $741

Received, November 1 (80,000/114) 702
Exchange loss $ 39

DIF: 3 REF: p. 825-826 OBJ: 3

NAT: AACSB Analytic | IMA Global business

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14 Managerial Accounting

48. Refer to Figure 18-7. If Coral's policy is to hedge foreign currency transactions, the exchange gain
or loss would be (round to the nearest dollar)
a. $32 gain
b. $32 loss
c. $7 loss
d. $7 gain
ANS: C
SUPPORTING CALCULATIONS:

Receivable, September 1 (80,000/108) $741

Forward contract (80,000/109) 734
Exchange loss $ 7

DIF: 3 REF: p. 825-826 OBJ: 3

NAT: AACSB Analytic | IMA Global business

49. On May 1, Grayson, Inc., received an order from a Canadian customer for 440,000 Canadian dollars
to be paid on receipt of the goods scheduled for July 1. On July 1, Grayson received the Canadian
customer's payment and recorded an exchange gain of $20,000.

If the exchange rate on May 1 was $1 U.S. for $1.10 Canadian dollars, the exchange rate for $1 U.S.
on July 1 must have been approximately
a. 0.78 Canadian dollars
b. 0.91 Canadian dollars
c. 0.95 Canadian dollars
d. 1.05 Canadian dollars
ANS: D
SUPPORTING CALCULATIONS:

Receivable, May 1 (440,000/1.10) $400,000

Add: Exchange gain 20,000
Amount received, July 1 $420,000

440,000/$420,000 = 1.05 Canadian dollars

DIF: 3 REF: p. 825-826 OBJ: 3

NAT: AACSB Analytic | IMA Global business

50. On March 1, Groves, Inc., a U.S. company, received an order from a Japanese customer for 100,000
yen to be received in 90 days. If the dollar strengthened against the yen throughout March, April,
and May, Groves would have a(n)
a. exchange gain
b. exchange loss
c. no gain or loss
d. advance pricing agreement
ANS: A DIF: 2 REF: p. 826
OBJ: 3 NAT: AACSB Reflective thinking | IMA Global business

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 Chapter 18/International Issues in Management Accounting 15
51. Hedging is used to
a. insure against gains and losses on foreign currency exchanges
b. manage economic risk
c. manage all foreign exchange exposure
d. do all of the above
ANS: D DIF: 3 REF: p. 826
OBJ: 3 NAT: AACSB Analytic | IMA Global business

Figure 18-8

On February 1, Griffin, Inc., placed an order for production equipment with a German company for
40,000 Deutsche marks to be paid on April 1. The exchange rates for $1 U.S. are as follows:

Exchange Rates
of $1 for Deutsche Marks
Spot rate, February 1 1.45
Forward rate, April 1 1.40
Spot rate, April 1 1.47

52. Refer to Figure 18-8. The amount of the liability that Griffin should record at the time of purchase
would be (round to the nearest dollar)
a. $58,000
b. $27,211
c. $28,571
d. $27,586
ANS: D
SUPPORTING CALCULATIONS:

40,000/1.45 = $27,586

DIF: 3 REF: p. 826 OBJ: 3

NAT: AACSB Analytic | IMA Global business

53. Refer to Figure 18-8. The amount that Griffin should pay in U.S. dollars on April 1 would be (round
to the nearest dollar)
a. $58,800
b. $27,211
c. $28,571
d. $27,586
ANS: B
SUPPORTING CALCULATIONS:

40,000/1.47 = $27,211

DIF: 3 REF: p. 826 OBJ: 3

NAT: AACSB Analytic | IMA Global business

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resold, copied, or distributed without the prior consent of the publisher.
16 Managerial Accounting
Figure 18-9

On June 1, Simpson, Inc., purchased goods costing 70,000 yen from a Japanese supplier. Payment
for the goods is due August 1. The exchange rates for $1 U.S. are as follows:

Exchange Rates
of $1 for Yen
Spot rate, June 1 102
Forward rate, August 1 104
Spot rate, August 1 108

54. Refer to Figure 18-9. If Simpson does NOT hedge foreign currency transactions, the exchange gain
or loss would be (round to the nearest dollar)
a. $25 gain
b. $25 loss
c. $38 gain
d. $38 loss
ANS: C
SUPPORTING CALCULATIONS:

Liability, June 1 (70,000/102) $686

Payment, August 1 (70,000/108) 648
Exchange gain $ 38

DIF: 3 REF: p. 826 OBJ: 3

NAT: AACSB Analytic | IMA Global business

55. Refer to Figure 18-9. If Simpson's policy was to hedge foreign currency transactions, the exchange
gain or loss would be (round to the nearest dollar)
a. $13 gain
b. $13 loss
c. $25 gain
d. $25 loss
ANS: A
SUPPORTING CALCULATIONS:

Liability, June 1 (70,000/102) $686

Forward contract (70,000/104) 673
Exchange gain $ 13

DIF: 3 REF: p. 825-826 OBJ: 3

NAT: AACSB Analytic | IMA Global business

Figure 18-10

On May 1, Eric, Inc., received an order from a French customer for 20,000 francs to be paid on
September 1. The exchange rates for $1 U.S. are as follows:

Exchange Rates

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 Chapter 18/International Issues in Management Accounting 17
of $1 for French Francs
Spot rate, May 1 5.50
Forward rate, September 1 5.40
Spot rate, September 1 5.00

56. Refer to Figure 18-10. The amount that Eric would receive from the French customer in U.S. dollars
if payment were received at the time the order was placed would be (round to the nearest dollar)
a. $110,000
b. $3,636
c. $3,703
d. $4,000
ANS: B
SUPPORTING CALCULATIONS:

20,000/5.50 = $3,636

DIF: 3 REF: p. 825-826 OBJ: 3

NAT: AACSB Analytic | IMA Global business

57. Refer to Figure 18-10. The amount that Eric would receive from the French customer in U.S. dollars
if payment were received on September 1 would be (round to the nearest dollar)
a. $100,000
b. $3,636
c. $3,703
d. $4,000
ANS: D
SUPPORTING CALCULATIONS:

20,000/5.0 = $4,000

DIF: 3 REF: p. 826 OBJ: 3

NAT: AACSB Analytic | IMA Global business

Figure 18-11

On January 1, Kramer, Inc., placed an order for production equipment with a British company for
40,000 pounds to be paid on March 1. The exchange rates for $1 U.S. are as follows:

Exchange Rates
of $1 for British Pounds
Spot rate, January 1 .58
Forward rate, March 1 .60
Spot rate, March 1 .66

58. Refer to Figure 18-11. The amount of the liability that Kramer should record at the time of purchase
would be (round to the nearest dollar)
a. $69,228
b. $68,966

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18 Managerial Accounting
c. $66,667
d. $23,200
ANS: B
SUPPORTING CALCULATIONS:

40,000/.58 = $68,966

DIF: 3 REF: p. 826 OBJ: 3

NAT: AACSB Analytic | IMA Global business

59. Refer to Figure 18-11. The amount that Kramer would pay in U.S. dollars on March 1 would be
(round to the nearest dollar)
a. $68,965
b. $66,667
c. $60,606
d. $26,400
ANS: C
SUPPORTING CALCULATIONS:

40,000/.66 = $60,606

DIF: 3 REF: p. 826 OBJ: 3

NAT: AACSB Analytic | IMA Global business

Figure 18-12

On October 1, Selig, Inc., received an order from a British customer for 15,000 British pounds to be
paid on December 1. The exchange rates for $1 U.S. are as follows:

Exchange Rates
of $1 for British Pounds
Spot rate, October 1 .70
Forward rate, December 1 .68
Spot rate, December 1 .69

60. Refer to Figure 18-12. The amount that Selig would receive from the British customer in U.S.
dollars if payment were received at the time the order was placed would be (round to the nearest
dollar)
a. $21,429
b. $22,059
c. $10,500
d. $10,350

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 Chapter 18/International Issues in Management Accounting 19

ANS: A
SUPPORTING CALCULATIONS:

15,000/.70 = $21,429

DIF: 2 REF: p. 827 OBJ: 3

NAT: AACSB Analytic | IMA Global business

61. Refer to Figure 18-12. The amount that Selig would receive from the British customer in U.S.
dollars if payment were received on December 1 would be (round to the nearest dollar)
a. $21,429
b. $22,059
c. $21,739
d. $10,350
ANS: C
SUPPORTING CALCULATIONS:

15,000/.69 = $21,739

DIF: 3 REF: p. 827 OBJ: 3

NAT: AACSB Analytic | IMA Global business

62. You are the manager of the French Division of a U.S. company. The French franc has continuously
devalued relative to the U.S. dollar in the past three years. In which currency would you prefer to be
evaluated?
a. U.S. dollar
b. Canadian dollar
c. French franc
d. Mexican peso
ANS: C DIF: 3 REF: p. 828
OBJ: 3 NAT: AACSB Reflective thinking | IMA Global business

63. What is the purpose of a dollar-denominated internal report?

a. to determine the most favorable rate of return for a multinational corporation
b. to determine whether to report accounting figures in the U.S. or foreign currency
c. to measure all figures on the same basis
d. to measure all figures on different bases depending on the country
ANS: C DIF: 2 REF: p. 829
OBJ: 3 NAT: AACSB Reflective thinking | IMA Global business

64. Advantages of decentralization in a multinational corporation include all of the following EXCEPT
a. providing training for local managers in order to develop managerial skills
b. motivating local managers due to the increased autonomy decentralization brings
c. affording managers with the opportunity to respond quickly to on site situations
d. freeing up local management from day-to-day operations so that they can spend more time
on long-range activities

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20 Managerial Accounting

ANS: D DIF: 3 REF: p. 829-830

OBJ: 4 NAT: AACSB Reflective thinking | IMA Global business

65. Which of the following is true concerning advantages of decentralizing in the multinational
corporation?
a. Local managers are unable to respond as quickly to customer concerns.
b. Decentralization permits an organization to act locally rather than waiting for decisions to
be made off site
c. Legal barriers are increased when operating in a decentralized multinational corporation
d. all of the above
ANS: B DIF: 3 REF: p. 829-830
OBJ: 4 NAT: AACSB Reflective thinking | IMA Global business

66. A multinational corporation (MNC) might create divisions along

a. geographic lines
b. product lines
c. functional management lines
d. all of the above
ANS: D DIF: 2 REF: p. 830
OBJ: 4 NAT: AACSB Reflective thinking | IMA Global business

67. Which of the following statements is NOT true about measuring performance in a multinational
corporation (MNC)?
a. The evaluation of the division's managers should be the same as the evaluation of the
division.
b. It is difficult to compare the performance of a manager of a division in one country with
the performance of a manager of a division in another country.
c. Both economic value added (EVA) and return on investment (ROI) are important
measures of managerial performance.
d. All of the above are true statements.
ANS: A DIF: 2 REF: p. 830
OBJ: 5 NAT: AACSB Reflective thinking | IMA Global business

68. Which of the following would NOT be an appropriate performance evaluation measurement for the
manager of a MNC division?
a. revenues incurred
b. costs incurred
c. currency fluctuations
d. increases in sales
ANS: C DIF: 2 REF: p. 830
OBJ: 5 NAT: AACSB Reflective thinking | IMA Global business

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 Chapter 18/International Issues in Management Accounting 21
Figure 18-13

The vice president of Transborder, Inc., was reviewing the latest results for two divisions of the
company. The first division, located in the Philippines, had posted a net income of $100,000 on
assets of $1,000,000. The second division, located in England, showed net income of $230,000 on
assets of $2,000,000.

69. Refer to Figure 18-13. The ROI for the Philippine and English divisions are
a. 11.5% and 10%, respectively
b. 5% and 23%, respectively
c. 10% and 11.5%, respectively
d. 23% and 5%, respectively
ANS: C
SUPPORTING CALCULATIONS:

Philippine division's ROI = $100,000/$1,000,000 = 10%

English division's ROI = $230,000/$2,000,000 = 11.5%

DIF: 2 REF: p. 831 OBJ: 5

NAT: AACSB Analytic | IMA Global business

70. Refer to Figure 18-13. How do the two divisions compare?

a. The English division performed better than the Philippine division.
b. The Philippine division performed better than the English division.
c. The Philippine and English divisions performed the same.
d. A comparison cannot be made without weighing cultural and environmental factors faced
by both divisions.
ANS: D DIF: 2 REF: p. 831
OBJ: 5 NAT: AACSB Reflective thinking | IMA Global business

71. Which of the following statements is TRUE about measuring performance in a multinational
corporation (MNC)?
a. The evaluation of the division's managers should be the same as the evaluation of the
division.
b. It is easy to compare the performance of a manager of a division in one country with the
performance of a manager of a division in another country.
c. Both economic value added (EVA) and return on investment (ROI) are important
measures of managerial performance.
d. Legal factors are not part of the evaluation process for measuring performance in the
MNC.
ANS: C DIF: 2 REF: p. 833
OBJ: 5 NAT: AACSB Reflective thinking | IMA Global business

72. In considering income taxes and transfer pricing, a multinational corporation (MNC) will try to use
transfer pricing to
a. shift costs to high-tax countries
b. shift revenues to low-tax countries

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22 Managerial Accounting
c. Both a and b are correct.
d. Neither a nor b is correct.
ANS: C DIF: 2 REF: p. 834
OBJ: 6 NAT: AACSB Reflective thinking | IMA Global business

73. Internal Revenue Code Section 482 requires that the transfer prices set by U.S.-based multinationals
a. should be denominated in dollars
b. should match the price that would be set by unrelated parties
c. should not be based on the cost-plus method
d. None of the above are correct.
ANS: B DIF: 2 REF: p. 834
OBJ: 6 NAT: AACSB Reflective thinking | IMA Global business

Figure 18-14

Copperfield Manufacturing has one plant located in Switzerland and another plant located in the
United States. The Swiss plant manufactures a component used in a finished product produced at the
U.S. plant. Currently, the Swiss plant is operating at 80 percent capacity. In Switzerland, the income
tax rate is 42 percent; in the United States, the corporate income tax rate is 35 percent.

The U.S. plant does not use all of the output produced by the Swiss plant. Excess output is sold in
the United States for $120 per unit. The costs to manufacture the component (stated in U.S. dollars)
are as follows:

Direct materials $25

Direct labor 15
Variable overhead 5
Fixed overhead 10

74. Refer to Figure 18-14. What is the minimum transfer price that Copperfield's Swiss division would
be willing to accept?
a. $45
b. $50
c. $55
d. $120
ANS: A
SUPPORTING CALCULATIONS:

The minimum transfer price that the Swiss division would be willing to accept would cover the
variable costs of manufacturing the component ($25 + $15 + $5 = $45).

DIF: 3 REF: p. 834-835 OBJ: 6

NAT: AACSB Analytic | IMA Global business

75. Refer to Figure 18-14. What is the maximum transfer price that Copperfield's U.S. division would be
willing to pay?
a. $45
b. $50

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 Chapter 18/International Issues in Management Accounting 23
c. $55
d. $120
ANS: D
SUPPORTING CALCULATIONS:

The maximum transfer price that the U.S. division would be willing to pay would be the market
price of $120.

DIF: 3 REF: p. 834-835 OBJ: 6

NAT: AACSB Analytic | IMA Global business

76. Hanover Manufacturing has one plant located in Belgium and another plant located in the United
States. The Belgium plant manufactures a component used in a finished product produced at the
U.S. plant. Currently, the Belgium plant is operating at 70 percent capacity. In Belgium, the income
tax rate is 42 percent; in the United States, the corporate income tax rate is 35 percent.

The market price of the component is $100, and the Belgium plant's costs to manufacture the
component are as follows:

Direct materials $10

Direct labor 20
Variable overhead 5
Fixed overhead 25

Which transfer price would be in the best interests of the overall corporation?
a. $35
b. $55
c. $60
d. $100
ANS: A
SUPPORTING CALCULATIONS:

A transfer price of $35 (the variable manufacturing cost) would minimize the amount of income
taxes the corporation must pay because more profit would be taxed at the U.S. rate of 35 percent and
less would be taxed at Belgium's 42 percent tax rate.

DIF: 3 REF: p. 834-835 OBJ: 6

NAT: AACSB Analytic | IMA Global business

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resold, copied, or distributed without the prior consent of the publisher.
24 Managerial Accounting
Figure 18-15

Hampton Manufacturing has one plant located in Belgium and another plant located in the United
States. The Belgium plant manufactures a component used in a finished product produced at the
U.S. plant. Currently, the Belgium plant is operating at 70 percent capacity. In Belgium, the income
tax rate is 42 percent; in the United States, the corporate income tax rate is 35 percent.

The market price of the component is $140, and the Belgium plant's costs to manufacture the
component are as follows:

Direct materials $15

Direct labor 25
Variable overhead 6
Fixed overhead 28

77. Refer to Figure 18-15. What is the transfer price that Hampton's Belgium division would accept if
the full cost-plus method is used and the company has a markup policy of 50% for external sales by
the U.S. and shipping costs of $5?
a. $140
b. $74
c. $68
d. $79
ANS: D
SUPPORTING CALCULATIONS:

The transfer price that the Belgium division would accept would cover the costs of manufacturing
the component and the shipping cost ($15 + $25 + $6 + 28 + 5= $79).

DIF: 3 REF: p. 835 OBJ: 6

NAT: AACSB Analytic | IMA Global business

78. Refer to Figure 18-15. Which transfer price would be in the best interests of the overall corporation?
a. the price based on forward rates
b. the price based on spot rates
c. the price based on market
d. the price based on variable cost
ANS: D
SUPPORTING CALCULATIONS:

A transfer price based on the manufacturing variable cost would minimize the amount of income
taxes the corporation must pay because more profit would be taxed at the U.S. rate of 35 percent and
less would be taxed at Belgium's 42 percent tax rate.

DIF: 3 REF: p. 835 OBJ: 6

NAT: AACSB Analytic | IMA Global business

79. Which of the following statements is NOT true about advance pricing agreements (APAs)?
a. An APA is an agreement between the IRS and a taxpayer on the transfer pricing method to

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resold, copied, or distributed without the prior consent of the publisher.
 Chapter 18/International Issues in Management Accounting 25
be applied in an international transaction.
b. An APA can cover transfers of intangibles and sales of property as well as other items.
c. An APA is binding on both the IRS and the taxpayer for the years specified.
d. All of the above are true statements.
ANS: D DIF: 3 REF: p. 835
OBJ: 6 NAT: AACSB Reflective thinking | IMA Global business

80. Which of the following methods is the transfer pricing method preferred by the IRS?
a. negotiated transfer price method
b. cost-plus method
c. comparable uncontrolled price method
d. all of the above
ANS: D DIF: 2 REF: p. 835
OBJ: 6 NAT: AACSB Reflective thinking | IMA Global business

81. Which of the following methods uses market price as the transfer price?
a. resale price method
b. cost-plus method
c. comparable uncontrolled price method
d. advance pricing agreement
ANS: C DIF: 2 REF: p. 835
OBJ: 6 NAT: AACSB Reflective thinking | IMA Global business

82. Braddock Industries, an American firm, imports component parts from Moreno, a related firm
located in Spain. The part costs Moreno $165 to produce, and all of Moreno's output is sold to
Braddock. A similar product from a competing firm usually sells in the United States for $200.
Shipping costs are $15 per unit. The transfer price was $200 plus the $15 shipping cost. Which
transfer pricing method is being used?
a. resale price method
b. cost-plus method
c. comparable uncontrolled price method
d. advance pricing agreement
ANS: C DIF: 3 REF: p. 835
OBJ: 6 NAT: AACSB Analytic | IMA Global business

83. Braddock Industries, an American firm, imports component parts from Moreno, a related firm
located in Spain. The part costs Moreno $165 to produce, and all of Moreno's output is sold to
Braddock. A similar product from a competing firm usually sells in the United States for $200.
Shipping costs are $15 per unit. The transfer price was $165 plus the $15 shipping cost. Which
transfer pricing method is being used?
a. resale price method
b. cost-plus method
c. comparable uncontrolled price method
d. advance pricing agreement
ANS: B DIF: 3 REF: p. 835
OBJ: 6 NAT: AACSB Analytic | IMA Global business

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resold, copied, or distributed without the prior consent of the publisher.
26 Managerial Accounting
Figure 18-16

Valley TeleManufacturing Company has two plants, one located in the United States and the other
located in Austria. The Austrian plant manufactures a component used in a finished product at the
U.S. plant. The Austrian income tax rate is 44 percent, and the U.S. income tax rate is 35 percent.
The component's costs are as follows:

Variable costs $15

Fixed costs 5
Shipping cost 3
Commission 4

The normal market price of this component in the United States and in Austria, if the company were
to buy it, is $30.

84. Refer to Figure 18-16. What transfer price would the IRS prefer, assuming that commissions are
avoided when an internal transfer is made?
a. $27
b. $29
c. $30
d. $18
ANS: B
SUPPORTING CALCULATIONS:

Preferred method: Comparable uncontrolled price method

Market price + Shipping - Avoidable costs

$30 + $3 - $4 = $29

DIF: 3 REF: p. 835 OBJ: 6

NAT: AACSB Analytic | IMA Global business

85. Refer to Figure 18-16. What transfer price would be set using the resale price method, assuming the
typical markup is 20 percent of cost?
a. $30
b. $24
c. $25
d. $29
ANS: C
SUPPORTING CALCULATIONS:

$30/1.2 = $25

DIF: 2 REF: p. 835 OBJ: 6

NAT: AACSB Analytic | IMA Global business

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resold, copied, or distributed without the prior consent of the publisher.
 Chapter 18/International Issues in Management Accounting 27
86. Refer to Figure 18-16. What transfer price would be set using the cost-plus method, assuming no
markup?
a. $30
b. $27
c. $20
d. $23
ANS: D
SUPPORTING CALCULATIONS:

$15 + $5 + $3 = $23

DIF: 2 REF: p. 835 OBJ: 6

NAT: AACSB Analytic | IMA Global business

87. Refer to Figure 18-16. What transfer price would Valley prefer to use?
a. $23
b. $30
c. $27
d. $15
ANS: A
SUPPORTING CALCULATIONS:

Valley would want to show no profit in Austria because of the higher income tax rate.

DIF: 3 REF: p. 835 OBJ: 6

NAT: AACSB Reflective thinking | IMA Global business

88. Which of the following is NOT a prerequisite for the establishment of an ethical business
environment?
a. basic societal stability
b. legitimacy and accountability of government
c. legitimacy of private ownership and personal wealth
d. All of the above are prerequisites for an ethical business environment.
ANS: D DIF: 2 REF: p. 837
OBJ: 7 NAT: AACSB Analytic | IMA Global business

PROBLEM

1. Harrington, Inc., imports merchandise that it resells in the United States. The merchandise is stored
in a company warehouse located in a foreign trade zone. The average shipment of merchandise costs
$800,000, and on average, the inventory is stored for four months before it is moved from the
warehouse in the foreign trade zone. Inventory shrinkage at the warehouse due to breakage is about
4 percent of the total. The average tariff rate on the imports is 15 percent. The company's carrying
cost is 12 percent.

Required:

a. Determine total tariff and tariff-related costs per shipment, given that the warehouse is

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resold, copied, or distributed without the prior consent of the publisher.
28 Managerial Accounting
located in a foreign trade zone.

b. Determine total tariff and tariff-related costs per shipment if the warehouse were not
located in a foreign trade zone.

c. Determine the annual cost savings due to the warehouse's location in a foreign trade zone.

ANS:
a. Tariff paid per shipment ($800,000 ´ 96% ´ 15%) $115,200

b. Tariff paid at purchase ($800,000 ´ 15%) $120,000

Carrying cost of tariff ($800,000 ´ 15% ´ 12% ´ 4/12) 4,800
Total tariff and tariff-related cost per shipment $124,800

c. Cost savings per shipment = $124,800 - $115,200 = $9,600

$9,600 per shipment ´ 3 shipments per year = $28,800

DIF: 3 REF: p. 820 OBJ: 2

NAT: AACSB Analytic | IMA Global business

2. Trenton, Inc., imports merchandise from Hong Kong for distribution in the United States. On March
1 the company purchased merchandise costing 700,000 Hong Kong dollars. Payment is due on June
1. The exchange rates for $1 U.S. were as follows:

Spot rate, March 1 7.00 Hong Kong dollars

Spot rate, June 1 8.00 Hong Kong dollars

Required:

a. How much would Trenton have to pay for the purchase in U.S. dollars if it paid on March
1?

b. How much would Trenton have to pay for the purchase in U.S. dollars if it paid on June
1?

ANS:
a. 700,000 Hong Kong dollars/7 = $100,000
b. 700,000 Hong Kong dollars/8 = $87,500

DIF: 2 REF: p. 826 OBJ: 3

NAT: AACSB Analytic | IMA Global business

3. Greatlakes, Inc., imports merchandise from Taiwan for distribution in the United States. On
February 1 the company purchased merchandise costing 500,000 Taiwan dollars. Payment is due on
May 1. The exchange rates for $1 U.S. were as follows:

Spot rate, February 1 27.00 Taiwan dollars

Spot rate, May 1 25.00 Taiwan dollars

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 Chapter 18/International Issues in Management Accounting 29

Required:

a. How much would Greatlakes have to pay for the purchase in U.S. dollars if it paid on February
1?

b. How much exchange gain or loss (if any) will Greatlakes recognize if it pays for the purchase in
U.S. dollars on May 1?

ANS:
a. 500,000 Taiwan dollars/27 = $18,519

b. Liability, February 1 (500,000 T$/27) $18,519

Amount paid, May 1 (500,000 T$/25) 20,000
Exchange loss $ 1,481

DIF: 2 REF: p. 825-826 OBJ: 3

NAT: AACSB Analytic | IMA Global business

4. On July 1, Ponderosa, Inc., received an order from an Italian customer for 700,000 lira to be paid on
September 1. The exchange rates for $1 U.S. were as follows:

Spot rate, July 1 1,500 lira

Forward rate, September 1 1,700 lira
Spot rate, September 1 2,000 lira

Required:

a. If Ponderosa receives payment from the Italian customer using the spot rate at the time of
payment, what would be Ponderosa's exchange gain or loss?

b. If Ponderosa's policy is to hedge foreign currency transactions, what is Ponderosa's

exchange gain or loss?

ANS:
a. Receivable in dollars, July 1 (700,000/1,500) $467
Received in dollars, September 1 (700,000/2,000) 350
Exchange loss $117

b. Receivable in dollars, July 1 (700,000/1,500) $467

Forward contract (700,000/1,700) 412
Exchange loss $ 55

DIF: 3 REF: p. 826-827 OBJ: 3

NAT: AACSB Analytic | IMA Global business

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resold, copied, or distributed without the prior consent of the publisher.
30 Managerial Accounting
5. Wheatfield, Inc., imports merchandise from Germany for distribution in the United States. On May
1, the company purchased merchandise costing 120,000 Deutsche marks (DM). Payment is due in
Deutsche marks on July 1. The exchange rates for $1 U.S. were as follows:

Spot rate, May 1 1.60 DM

Spot rate, July 1 1.50 DM

Required:

Determine the exchange gain or loss on the transaction.

ANS:
Liability, May 1 (120,000 DM/1.60) $75,000
Amount paid, July 1 (120,000 DM/1.50) 80,000
Exchange loss $ 5,000

DIF: 3 REF: p. 825-826 OBJ: 3

NAT: AACSB Analytic | IMA Global business

6. On February 1, Bakersfield, Inc., received an order from a Swiss customer for 15,000 Swiss francs
to be paid on April 1. The exchange rates for $1 U.S. were as follows:

Spot rate, February 1 1.20 Swiss francs

Spot rate, April 1 1.50 Swiss francs

Required:

Determine the exchange gain or loss on the transaction.

ANS:
Receivable, February 1 (15,000 SF/1.20) $12,500
Amount received, April 1 (15,000 SF/1.50) 10,000
Exchange loss $ 2,500

DIF: 2 REF: p. 826 OBJ: 3

NAT: AACSB Analytic | IMA Global business

7. On November 1, Stoker, Inc., purchased merchandise from a Japanese supplier costing 480,000 yen
to be paid on December 15. The rates for $1 U.S. were as follows:

Spot rate, November 1 128 yen

Forward rate, December 15 125 yen
Spot rate, December 15 120 yen

Required:

a. Determine Stoker's exchange gain or loss using the spot rate at December 15.

b. Determine Stoker's exchange gain or loss if Stoker has a policy of hedging foreign currency
transactions.

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 Chapter 18/International Issues in Management Accounting 31

ANS:
a. Payable in dollars, November 1 (480,000/128) $3,750
Paid in dollars, December 15 (480,000/120) 4,000
Exchange loss $ 250

b. Payable in dollars, November 1 (480,000/128) $3,750

Forward contract (480,000/125) 3,840
Exchange loss $ 90

DIF: 3 REF: p. 826-827 OBJ: 3

NAT: AACSB Analytic | IMA Global business

8. Minaret, Inc., has two manufacturing plants. One is located in Hong Kong and the other in El Paso,
Texas. The El Paso plant is located in a foreign trade zone. The Hong Kong plant manufactures a
component used in the manufacture of the El Paso plant's main product. Recently, El Paso ordered
parts with a cost-plus transfer price of $20,000 (U.S. dollars). Typically, 3 percent of the parts
shipped to El Paso by the Hong Kong plant are defective. The U.S. tariff on the component parts is
25 percent. The part typically remains in the El Paso plant for approximately three months before it
is shipped out as part of El Paso's finished product. The company's carrying cost is 14 percent.
(Round to the nearest dollar.)

Required:

a. Determine the total cost of the imported parts that the El Paso plant will incur, given its
location in a foreign trade zone.

b. Determine the total cost that would have been incurred if the warehouse had not been
located in a foreign trade zone.

c. Comment on Minaret's transfer price policy.

ANS:
a. Component part cost $20,000
Tariff paid per shipment ($20,000 ´ 97% ´ 25%) 4,850
Total component cost $24,850

b. Component part cost $20,000

Tariff paid at purchase ($20,000 ´ 25%) 5,000
Carrying cost of tariff ($20,000 ´ 25% ´ 14% ´ 3/12) 175
Total component cost $25,175

c. The cost-plus method of determining a transfer price is acceptable to the IRS but is less
desirable than the comparable uncontrolled price method or the resale price method.

DIF: 3 REF: p. 825 OBJ: 6

NAT: AACSB Analytic | IMA Global business

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32 Managerial Accounting
9. Ginger TeleManufacturing Company has three subsidiaries that are located in Austria, the United
States, and Brazil. The Austrian plant manufactures a finished product and exports it to the U.S. and
Brazilian subsidiaries. The Austrian income tax rate is 44 percent, the U.S. income tax rate is 35
percent, and the Brazilian income tax rate is 30 percent. Import duty for the United States is 10
percent and for Brazil is 18 percent. The component's costs are as follows:

Variable costs $30

Fixed costs 14
Shipping cost 5
Commission 4

The component sells for $70 in the United States and $65 in Brazil. The Austrian company has
excess capacity to produce 10,000 units annually. Shipping cost is paid by the buying subsidiary.
The commission is not incurred when sold to another subsidiary.

Required:

a. Assume the component is very popular and both the U.S. and Brazilian subsidiaries can
sell 10,000 units. How many units should be sold to the U.S. subsidiary and how many to
the Brazilian subsidiary? At what transfer price?

b. Assume that all the components would be sold to the U.S. subsidiary and that the market
price of the component in Austria is also $70. What transfer price would the IRS prefer?

ANS:
a. U.S. subsidiary: Transfer price ($44) should be cost, because the income tax rate is lower
in the United States than in Austria.

Austria U.S. Total

Sales 44.00 70.00
Costs (44.00) (44.00)
Shipping cost (5.00)
Tariff (10%) (4.40)
Profit before tax -0- 16.60
Income tax -0- 5.81
Profit after tax 10.79 107,900

Brazil subsidiary: Transfer price ($44) should be cost, because the income tax rate is lower
in Brazil than in Austria.

Austria Brazil Total

Sales 44.00 65.00
Costs (44.00) (44.00)
Shipping cost (5.00)
Tariff (18%) (7.92)
Profit before tax -0- 8.08
Income tax -0- 2.42
Profit after tax 5.66 56,600

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resold, copied, or distributed without the prior consent of the publisher.
 Chapter 18/International Issues in Management Accounting 33
The Austrian subsidiary should sell the 10,000 components to the U.S. subsidiary at a
transfer price of $44. The overall profits of the company would be higher.

b. The IRS would prefer the comparable uncontrolled price method that uses the market
price.

Market price 70
Shipping cost 5
Commission (4)
Transfer price 71

DIF: 3 REF: p. 835 OBJ: 6

NAT: AACSB Analytic | IMA Global business

ESSAY

1. What is the role of the management accountant in the international environment?

ANS:
Business management looks to the management accountant for financial and business expertise. The
management accountant must provide relevant information and so must keep up to date on the
accounting rules and business practices in different countries. The accountant must address the
income implications of foreign currency exchange, evaluate the policies and practices for their
impact, and be sensitive to ethical problems that may arise.

DIF: 2 REF: p. 818 OBJ: 1

NAT: AACSB Reflective thinking | IMA Global business

2. Discuss the advantages of a corporation locating facilities in a foreign trade zone.

ANS:
Two primary advantages of locating in a foreign trade zone are as follows:

· Companies can postpone payment of duties until the imported materials leave the foreign trade
zone. Since money has a time value, postponing the payment results in a cost savings.
· Duties are not paid on damaged or evaporated goods that never leave the foreign trade zone.

DIF: 2 REF: p. 819-820 OBJ: 2

NAT: AACSB Reflective thinking | IMA Global business

3. List at least three factors that play a role in the management accountant's assessment of the costs and
benefits of outsourcing in a multinational corporation.

ANS:
When assessing the costs and benefits of outsourcing in a multinational corporation, the following
factors should be considered:

1. the tax structures of the countries

2. the overall educational and skill level of the work force

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34 Managerial Accounting
3. infrastructure and communication capabilities

DIF: 2 REF: p. 821-822 OBJ: 2

NAT: AACSB Reflective thinking | IMA Global business

4. What is a maquiladora, and what advantage does it provide businesses?

ANS:
A maquiladora is a special type of joint venture in which manufacturing plants located in Mexico
process imported materials and reexport them to the United States. Mexico grants operators of
maquiladoras an exemption from Mexican laws governing foreign ownership, and the United States
grants an exemption from or reduction in custom duties levied on reexported goods. One of the main
advantages is the low-cost, high-quality labor found in Mexico.

DIF: 2 REF: p. 822-823 OBJ: 2

NAT: AACSB Reflective thinking | IMA Global business

5. What are the risks associated with foreign currency exchange and how are they managed?

ANS:
Exchange rates fluctuate and create transaction, economic and translation risks. Transaction risks are
the risk that future cash transactions will be affected by the changing exchange rates. Hedging with
forward exchange contracts insures against gains and losses.

Economic risk is the risk that the value of the firm will be affected by exchange rate
fluctuations.This is managed by understanding the position of the firm in the global economy.
Hedging is another way to address this risk.

Translation risk is the risk that the financial statements are exposed to exchange rate fluctuations.
Restating financial statements in home currency creates gains or losses. This should be addressed in
the notes to the financial statements.

DIF: 3 REF: p. 824-829 OBJ: 3

NAT: AACSB Reflective thinking | IMA Global business

6. Discuss the advantages of decentralization in a multinational corporation.

ANS:
The advantages of decentralization include the following:

· Local managers are often in a position to make better decisions.

· Local managers are capable of a more timely response.
· Decentralization for large, diversified companies is necessary because of cognitive limitations--
it is impossible for any one central manager to be fully knowledgeable of all products and
markets.
· Decentralization provides opportunities to train and motivate local managers.
· Decentralization frees up top management from day-to-day operating conditions so that they
can spend time on more long-range activities, such as strategic planning.

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resold, copied, or distributed without the prior consent of the publisher.
 Chapter 18/International Issues in Management Accounting 35

DIF: 2 REF: p. 829 OBJ: 4

NAT: AACSB Reflective thinking | IMA Global business

7. Explain why it is important for the multinational corporation to separate the evaluation of the
manager of the division from the evaluation of the division.

ANS:
In a multinational corporation, it is important to separate the evaluation of the manager of the
division from the evaluation of the division because a manager's performance evaluation should not
include factors over which he or she exercises no control. Environmental factors over which the
manager has no control include economic, legal, political, social, and cultural factors. These
environmental factors affect a division's profit and ROI, but because managers cannot control these
factors, the corporation must take the differing environmental factors into consideration when
assessing managerial performance.

DIF: 3 REF: p. 830-833 OBJ: 5

NAT: AACSB Reflective thinking | IMA Global business

8. Discuss two of the most important concerns of transfer pricing in the multinational firm?

ANS:
Transfer pricing must accomplish two objectives: performance evaluation and optimal determination
of income taxes. Performance evaluation is often based on income and return on investment.
Managers do not have control if the transfer price is set by management.Transfer pricing is used to
shift costs to high tax countries and shift revenues to low-tax countries. Transfer prices are driven by
the desire to lower tax assessments.

DIF: 2 REF: p. 833-834 OBJ: 6

NAT: AACSB Reflective thinking | IMA Global business

9. What ethical issues might affect firms operating in the international environment?

ANS:
Ethical issues arise because there are different cultures and different cultural expectations. Are
certain costs services fees or bribes? What is to be done when the laws are very strict but not
enforced? What is to be done with business laws that conflict between countries? What is to be done
if customarily children work and that yields unfavorable press over labor practices?

DIF: 2 REF: p. 836-837 OBJ: 7

NAT: AACSB Reflective thinking | IMA Global business

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36 Managerial Accounting

MATCHING

Match the following descriptions with the appropriate environmental factor used for performance
evaluation in the MNC.
a. Economic factor
b. Political and legal factors
c. Educational factors
d. Sociological factors
1. differing literacy rates
2. the effect of a country’s defense policy
3. the level of political unrest
4. cultural and racial diversity
5. degree of government control of business
6. organization of central banking system
7. existence of capital markets
8. attitude toward industry and business
9. currency restrictions
10. impact of foreign policy

1. ANS: C DIF: 2 REF: p. 832

OBJ: 5 NAT: AACSB Reflective thinking | IMA Global business
2. ANS: B DIF: 2 REF: p. 832
OBJ: 5 NAT: AACSB Reflective thinking | IMA Global business
3. ANS: B DIF: 2 REF: p. 832
OBJ: 5 NAT: AACSB Reflective thinking | IMA Global business
4. ANS: D DIF: 2 REF: p. 832
OBJ: 5 NAT: AACSB Reflective thinking | IMA Global business
5. ANS: B DIF: 2 REF: p. 832
OBJ: 5 NAT: AACSB Reflective thinking | IMA Global business
6. ANS: A DIF: 2 REF: p. 832
OBJ: 5 NAT: AACSB Reflective thinking | IMA Global business
7. ANS: A DIF: 2 REF: p. 832
OBJ: 5 NAT: AACSB Reflective thinking | IMA Global business
8. ANS: D DIF: 2 REF: p. 832
OBJ: 5 NAT: AACSB Reflective thinking | IMA Global business
9. ANS: A DIF: 2 REF: p. 832
OBJ: 5 NAT: AACSB Reflective thinking | IMA Global business
10. ANS: B DIF: 2 REF: p. 832
OBJ: 5 NAT: AACSB Reflective thinking | IMA Global business

This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be
resold, copied, or distributed without the prior consent of the publisher.