On January 1, 2014, Trenten Systems, a U.S.-based company, purchased a controlling interest in Grant Management Consultants located in Zurich, Switzerland. The acquisition was treated as a purchase transaction. The 2014 financial statements stated in Swiss francs are given below.

Direct exchange rates for Swiss franc are:

Required:

1. Translate the year-end balance sheet and income statement of the foreign subsidiary using the current rate method of translation.
2. Prepare a schedule to verify the translation adjustment.
3. Convert (remeasure) the financial statements of the foreign subsidiary using the temporal method of translation.
4. Prepare a schedule to verify the translation gain or loss.

Lyft has recently launched “Lyft Scooters” in various cities across the U.S. Imagine the company selects two individuals, Zahra in Madison, Wisconsin, and Mateo in Albuquerque, New Mexico, to test Lyft Scooters in their respective cities. Each recognizes that she or he has a 2% chance of experiencing an accident. If an accident occurs, a $12,000 will be lost due to injury and property damage.

1. What is Zahra’s probability distribution for loss arising out of an accident?

2. What is Zahra’s expected value of loss from an accident?

3. What is the standard deviation of Zahra’s probability distribution of loss arising out of an accident?

For questions 4-11, assume that Zahra and Mateo decide to pool (or share equally) their losses. The losses are uncorrelated.

4. How much will each person need to pay into the pot of pooled money in order to cover their losses in the event they both experience an accident?

5. What is the combined probability distribution when the two loss potentials are pooled?

6. What is the expected total loss for the distribution of pooled losses?

7. What is the expected loss per person from the distribution of pooled losses?

8. What is the standard deviation of the distribution of pooled losses?

9. What is the standard deviation of the distribution of pooled losses, per person?

10. If the number of people in the pool increases from 2 to 1000, how will this change influence each of the following? Use words, not numbers, to state whether they will they increase, decrease or stay the same.
    
    1. The expected total loss
       
       
    2. The expected loss per person
       
       
    3. The standard deviation of the total loss
       
       
    4. The standard deviation of loss per person

Based on your work so far, why might Zahra and Mateo choose to pool their losses?

MC Qu. 132 On November 12, Higgins...

On November 12, Higgins, Inc., a U.S. Company, sold merchandise on credit to Kagome of Japan at a price of 1,670,000 yen. The exchange rate was $.00854 per yen on the date of sale. On December 31, when Higgins prepared its financial statements, the exchange rate was $.00860. Kagome paid in full on January 12, when the exchange rate was $.00878. On December 31, Higgins should prepare the following journal entry:

Multiple Choice

-Debit Foreign Exchange Loss $100; Accounts Receivable-Kagome $100.

-Debit Foreign Exchange Loss $100; credit Sales $100.

-Debit Sales $100; credit Foreign Exchange Gain $100.

-Debit Accounts Receivable-Kagome $100; credit Foreign Exchange Gain $100.

-No journal entry is required until the amount is collected.

MC Qu. 119 MotorCity, Inc. purchased...

MotorCity, Inc. purchased 59,000 shares of Shaw common stock for $270,000. This represents 40% of the outstanding stock. The entry to record the transaction includes a:

Multiple Choice

-Debit to Long-Term Investments for $4,968,000.

-Credit to Long-Term Investments for $4,968,000.

-Debit to Long-Term Investments for $270,000.

-Debit to Short-Term Investment-AFS for $270,000.

-Debit to Long-Term Investments-HTM for $270,000.

MC Qu. 123 Marjam Company owns...

Marjam Company owns 51,600 shares of MacKenzie Company's 120,000 outstanding shares of common stock. MacKenzie Company pays $120,000 in total cash dividends to its shareholders. Marjam's entry to record this transaction should include a:

Multiple Choice

-Debit to Interest Revenue for $14,190.

-Credit to Long-Term Investments for $33,000.

-Credit to Long-Term investments for $51,600.

-Credit to Dividend Revenue for $33,000.

-Debit to Dividend Revenue for $14,190.

Costa Cruise Lines (CCL) (a U.S. company based in Miami, FL) purchased a ship from Komatsu Heavy Equipment for ¥700 million – payable in 1 year. The current spot rate is ¥110/$ and the one-year forward rate is ¥108/$. For borrowing (or depositing), the annual interest rate in Japan is 6%. In the United States, the rate is 2%. Yen call and put options, with a 1-year expiration date and an exercise price of $.009 are available. The price (premium) of the call option is $.002 per yen. The price (premium) of the put option is $.001 per yen. * Assume that one year from today, the spot rate for yen is either ¥130/$ or ¥105/$.

* If CCL decides to hedge with options, should they use a call or a put?

* If CCL follows the appropriate options hedging strategy, what is CCL’s net cost (in $US) to purchase the ship if the spot rate is ¥130/$?

* What is the net cost if the spot rate is ¥105/$? (Be sure to include the cost of buying the option in your answer.)

Your U.S. based company has purchased equipment from a German manufacturer worth €10,000,000 that is payable in one year. The current spot rate S(EUR/USD) is $1.13 and the F₁₂(EUR/USD) is $1.1037. The US interest rate is 5 percent and the German interest rate is 7.5 percent. Additionally, a call to buy euros at a strike price $1.11 in 12 months has a premium of $0.0007 per euro and a put at the same strike price have a premium of $0.003. Show the actions you would take and the net cost of the purchase in USD at the time the obligation is due using:

a) the forward market

b) a money market hedge

c) an options contract if the S₁₂ (EUR/USD) is $1.19

d) an options contract if the S₁₂ (EUR/USD) is $1.09.

Lyft has recently launched “Lyft Scooters” in various cities across the U.S. Imagine the company selects two individuals, Zahra in Madison, Wisconsin, and Mateo in Albuquerque, New Mexico, to test Lyft Scooters in their respective cities. Each recognizes that she or he has a 2% chance of experiencing an accident. If an accident occurs, a $12,000 will be lost due to injury and property damage.

For questions 4-11, assume that Zahra and Mateo decide to pool (or share equally) their losses. The losses are uncorrelated.

4. How much will each person need to pay into the pot of pooled money in order to cover their losses in the event they both experience an accident?

5. What is the combined probability distribution when the two loss potentials are pooled?

6. What is the expected total loss for the distribution of pooled losses?

7. What is the expected loss per person from the distribution of pooled losses?

8. What is the standard deviation of the distribution of pooled losses?

9. What is the standard deviation of the distribution of pooled losses, per person?

10. If the number of people in the pool increases from 2 to 1000, how will this change influence each of the following? Use words, not numbers, to state whether they will they increase, decrease or stay the same.
    
    1. The expected total loss
       
       
    2. The expected loss per person
       
       
    3. The standard deviation of the total loss
       
       
    4. The standard deviation of loss per person

Based on your work so far, why might Zahra and Mateo choose to pool their losses?

Oraby Company imports goods from different countries. Some transactions are denominated in U.S. dollars and others in foreign currencies. A summary of accounts receivable and accounts payable on December 31, 2008, before adjustments for the effects of changes in exchange rates during 2008, follows:

Accounts receivable:

In US dollars                                    $100 000

In 60 000 Swiss francs (SFr)            $50 000

Accounts payable:
In US dollars                                    $86 000

In 10 000 000 Yen                           $ 97 000

The spot rates on December 31, 2008, were:
1 SFr = $0.85

1 Yen = $0.0095

The average exchange rates during the collection and payment period in 2009 are:
1 SFr = $0.9

1 Yen = $0.0098
  
Required:

1) Prepare the adjusting entries on December 31, 2008.
2) Record the collection of the accounts receivable and the payment of the accounts payable in 2009.
3) What was the foreign currency gain or loss on the accounts receivable transaction denominated in SFr for the year ended December 31, 2008? For the year ended December 31, 2009? Overall for this transaction?
4) What was the foreign currency gain or loss on the accounts payable transaction denominated in Yen? For the year ended December 31, 2008? For the year ended December 31, 2009? Overall for this transaction?

Stoney Run Construction Company (U.S. GAAP) enters into a 3-year contract to build a new warehouse facility. Information for Years 1, 2, and 3 is shown below:

Question 4:

Calculate the gross profit booked in Year 2:

Question 5:

Book the following journal entries for Year 2:

1-Record costs incurred

2-Record billings on contract

3-Record payments received

4-Record revenue/cost during construction period

Honest Tea: Organizational Structure

Honest Tea (U.S.) is a bottled organic tea company based in Bethesda, Maryland. It was founded in 1998 by Seth Goldman and Barry Nalebuff. The company is a wholly owned subsidiary of the Coca-Cola Company. Coca-Cola invested 40% in 2008 and bought the rest of the company in 2011. Honest Tea is known for its organic and fair trade products and is one of the fastest growing private companies.

Honest Tea started off with a handful of employees bringing out five products, three of which are still in the market. As Honest Tea began to grow, it became necessary to have workers specialized in different tasks so that they ultimately function as a single unit. Today the company has over 35 package varieties of not only tea but other beverages as well.

Honest Tea caters to a group of customers that prefer organic or low calorie beverages over other types of beverages. The advantage here is that Honest Tea is able to use skilled specialists to deal with this unique customer base. Honest Tea came into this category of customers as a challenger. The whole process of sourcing material, production, marketing, and sales was different since it catered to a different group of customer.

Honest Tea finds that it must continually adapt to changing circumstances and environments. Initially organic or low calorie tea was the only product, but the firm has expanded to various other beverages. Bringing out new and innovative beverages is something that Honest Tea continues to do. Honest Tea follows a very transparent work culture which has helped them to avoid some of the problems that typical growing organizations face. Honest Tea believes that growth is continuous; the firm should never consider that they have finished achieving what they set out to accomplish.

1. Describe the role of division of labor and hierarchy ay Honest Tea.

2. In what ways has business strategy and organizational size impacted Honest Tea. How might this change in the future?

3. Does Honest Tea have more of an organic or mechanistic structure? How can you tell?