China and the U.S. - a Level Playing Field?

The "level playing field" argument has been used for years by anyone who feels that the competition from abroad is too intense. In the case of China, U.S. manufacturers argue that the currency (reminbi-yuan) is being manipulated and being undervalued, which makes Chinese goods cheap, relatively. More recently the reminbi has strengthened in value, however, it remains relatively cheap. It is also argued that the big Chinese steel and energy companies are State Owned Enterprises (SOE's) and not subject to the same constraints as a privately owned company - unfair competition in terms of easy financing, not having the same pressures to please shareholders, and of course, Chinese labor is argued to be dead cheap and not fair, too.

We see these arguments all the time from the U.S. and EU. So for this discussion, read a little (The Economist is a great source and the Financial Times will probably also help), but find some legitimate sources and let’s discuss the Chinese argument against the position that they are “cheating.” How can they defend their position?

1. Describe in general terms how future appreciation of the euro will likely affect the value (from the parent’s perspective) of a project established in Germany today by a U.S.-based MNC. Will the sensitivity of the project value be affected by the percentage of earnings remitted to the parent each year?

(4 pts) Huskie Industries, a U.S.‑based MNC, considers purchasing a small manufacturing company in France that sells products only within France. Huskie has no other existing business in France and no cash flows in euros. Would the proposed acquisition likely be more feasible if the euro is expected to appreciate or depreciate over the long run? Explain.

2. (4 pts) Flagstaff Corp. is a U.S.‑based firm with a subsidiary in Mexico. It plans to reinvest its earnings in Mexican government securities for the next 10 years since the inter­est rate earned on these securities is so high. Then, after 10 years, it will remit all accumulated earnings to the United States. What is a drawback of using this approach? (Assume the securities have no default or interest rate risk.

On January 1, 2018, Swifty Incorporated sold services to a Canadian supply company and accepted a three-year note in the amount of 10,100 Canadian dollars. Assume that exchange rates between the U.S. dollar and the Canadian dollar are as follows:

Provide the journal entries (in U.S. dollars) prepared by Swifty to record the receipt of the note and the exchange gains/losses recognized on December 31, 2018, and December 31, 2019. Ignore any interest on the note. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.)

2. Cholati is a foreign corporation that produces fine chocolates for sale worldwide. Cholati markets it chocolates in the United States through a U.S. limited liability company that is treated as a disregarded entity for U.S. tax purposes. The hybrid branch operates a sales office located in New York City. During the current year, Cholati’s effectively connected earnings and profits are $3 million, and its U.S. net equity is $6 million at the beginning of the year, and $4 million at the end of the year. In addition, a review of Cholati’s interest expense account indicates that it paid $440,000 of portfolio interest to an unrelated foreign corporation, $200,000 of interest to a foreign corporation which owns 15% of the combined voting power of Cholati’s stock and $160,000 of interest to a domestic corporation. Assume that Cholati does not reside in a treaty country.

a) Compute Cholati’s branch profits tax, and then complete Section III, Part I, Form 1120-F, page 5, lines 3-6.

b) Determine Cholati’s branch interest withholding tax obligations.

Many equipment replacement or outsourcing decisions have relevant qualitative considerations, which may impact the acceptance of a quantitative evaluation, regardless of the calculated outcome. For instance, Steve Smith has completed an analysis of budgeted volumes for the U.S. division of Swiss Chocolate Company for the coming year, and noted that the firm’s direct labor cost of production is significantly less per unit than its Swiss affiliate plant, but is higher than its Mexican affiliate plant. The Swiss corporate office has indicated that if its costs are not competitive with the Mexican plant, closure of the U.S. plant is imminent. Rick White has proposed a plan for automation of some of the processes, which are now completed by hand at the U.S. division. Although the expected results are attractive, five of 10, or half of the production staff, would be terminated. Consider the ethical implications of such a decision. Would the replacement of the equipment be optimal? What might the impacts be to the workforce? Would there be potential impacts on financial results that extend beyond the immediate savings proposed in the equipment replacement?

Answer all of these questions with the right question number next to the correct choice (letter).

Q2) When the government incurs budget deficits and there is a tight labor market (inflation):

A)It raises interest rates overall.

B)All the listed choices are correct

C)It becomes a large competitor in the market for loanable funds against corporations seeking the same funds.

D)The higher interest rates tend to choke economic growth.

Q4)Stock prices are said to provide a measure of the value of a corporation because:

A)Stock prices are rarely associated with a company's true value.

B)Markets are efficient and therefore stock prices incorporate all available information known to investors.

C)Stock prices are predetermined by the stock exchange and hence provide the best measure of a company's worth.

D)Stock prices reflect accounting book values and are therefore very accurate.

Q5)The CEO of an American car manufacturing plant buys engine parts from Japan shortly before the yen's value increases. The invoice is denominated in yens. The CEO exposed his company to:

A)Capital gains risk

B)Interest rate risk

C)Reinvestment rate risk

D)Exchange rate risk

David Gain was the chief executive officer (CEO) of Forest Media Corp., which became interested in acquiring RS Communications, Inc. To initiate negotiations, Gain met with RS’s CEO, Gill Raz, on Friday, July 12. Two days later, Gain phoned his brother Mark, who bought 3,800 shares of RS stock on the following Monday. Mark discussed the deal with their father, Jordan, who bought 20,000 RS shares on Thursday. On July 25, the day before the RS bid was due, Gain phoned his parents’ home, and Mark bought another 3,200 RS shares. The same routine was followed over the next few days, with Gain periodically phoning Mark or Jordan, both of whom continued to buy RS shares. Forest’s bid was refused, but on August 5, RS announced its merger with another company. The price of RS stock rose 30 percent, increasing the value of Mark’s and Jordan’s shares by $664,024 and $412,875, respectively.

1) Did Gain engage in insider trading? Explain.

2) What is required to impose sanctions for this offense? Explain.

3) Could a court hold Gain liable? Why or why not? Explain.

DaisyRose, Inc is an accounting firm with 30 accountants and has about $3 million annually in net revenues. They are located in an older office building that has a standard elevator. The accountant job descriptions require that they be able to analyze and prepare financial statements and tax returns for clients.

One of the accountants on staff, Iris, has developed macular degeneration and   because of that cannot see a standard computer screen. His doctors have told him that in the next few months he will not be able to see any computer screen. Iris has learned braille (raised type that allow those without sight to read). Iris approaches the CEO of DaisyRose to indicate that he needs voice activated software for his computer and that he would also need the computer to print in Braille so that he could read the returns and statements. Iris has also asked that the elevators be equipped with Braille on the touchpad so that he knows the proper buttons for each floor. The CEO calculates that all of these requests will cost about $100,000 up front and about $20,000 per year after that initial investment.

Please evaluate these facts under the Americans with Disabilities Act to determine whether or not the company will need to make the requested changes.

Rainy Day Company manufactures a unique umbrella. The company began operations April 1, 2020. Its accountant quit the second week of operations, and the company is searching for a replacement. The company has decided to test the knowledge and ability of all candidates interviewing for the position. Each candidate will be provided with the information below and then asked to prepare a series of reports, schedules, budgets, and recommendations based on that information. The information provided to each candidate is as follows.Cost Items and Account Balances Administrative salaries $11,250 Advertising 15,250 Cash, April 1 –0– Depreciation on factory building 1,500 Depreciation on office equipment 800 Insurance on factory building 1,500 Miscellaneous expenses—factory 1,000 Office supplies expense 300 Professional fees 500 Property taxes on factory building 400 Raw materials used 70,000 Rent on production equipment 6,000 Research and development 10,000 Sales commissions 40,000 Utility costs—factory 900 Wages—factory 70,000 Work in process, April 1 –0– Work in process, April 30 –0– Raw materials inventory, April 1 –0– Raw materials inventory, April 30 –0– Raw material purchases 70,000 Finished goods inventory, April 1 –0– Production and Sales Data Number of umbrellas produced 10,000 Expected sales in units for April ($40 unit sales price) 8,000 Expected sales in units for May 10,000 Desired ending inventory 20% of next month’s sales Direct materials per finished unit 1 kilogram Direct materials cost $7 per kilogram Direct labor hours per unit .35 Direct labor hourly rate $20Cash Flow Data Cash collections from customers: 75% in month of sale and 25% the following month. Cash payments to suppliers: 75% in month of purchase and 25% the following month. Income tax rate: 45%. Cost of proposed production equipment: $720,000. Manufacturing overhead and selling and administrative costs are paid as incurred. Desired ending cash balance: $30,000. Instructions Using all the data presented above, do the following.

Questions: 11. Prepare a flexible budget for manufacturing costs for activity levels between 8,000 and 10,000 units, in 1,000-unit increments. 12. Identify one potential cause of direct materials, direct labor, and manufacturing overhead variances in the production of the umbrella. 13. Determine the cash payback period on the proposed production equipment purchase, assuming a monthly cash flow as indicated in the cash budget

Rainy Day Company manufactures a unique umbrella. The company began operations April 1, 2020. Its accountant quit the second week of operations, and the company is searching for a replacement. The company has decided to test the knowledge and ability of all candidates interviewing for the position. Each candidate will be provided with the information below and then asked to prepare a series of reports, schedules, budgets, and recommendations based on that information. The information provided to each candidate is as follows.

Cost Items and Account Balances

Administrative salaries                                   $11,250

Advertising                                                      15,250

Cash, April 1                                            –0–

Depreciation on factory building                        1,500

Depreciation on office equipment                        800

Insurance on factory building                             1,500

Miscellaneous expenses—factory                      1,000

Office supplies expense                                         300

Professional fees                                                    500

Property taxes on factory building                        400

Raw materials used                                          70,000

Rent on production equipment                          6,000

Research and development                              10,000

Sales commissions                                            40,000

Utility costs—factory                                             900

Wages—factory                                                70,000

Work in process, April 1                         –0–

Work in process, April 30                       –0–

Raw materials inventory, April 1            –0–

Raw materials inventory, April 30         –0–

Raw material purchases                                   70,000

Finished goods inventory, April 1           –0–

Production and Sales Data

Number of umbrellas produced                     10,000

Expected sales in units for April

($40 unit sales price)                                       8,000

Expected sales in units for May                      10,000

Desired ending inventory                               20% of next month’s sales

Direct materials per finished unit                   1 kilogram

Direct materials cost                                       $7 per kilogram

Direct labor hours per unit                             .35

Direct labor hourly rate                                  $20

Cash Flow Data

Cash collections from customers: 75% in month of sale and 25% the following month.

Cash payments to suppliers: 75% in month of purchase and 25% the following month.

Income tax rate: 45%.

Cost of proposed production equipment: $720,000.

Manufacturing overhead and selling and administrative costs are paid as incurred.

Desired ending cash balance: $30,000.

Question: Prepare the Budgeted Income Statement for the Month of April 2020.