CASE STUDY IKEA
The first few years of the twenty-first century were difficult for IKEA, the U$31 billion global furniture powerhouse based in Sweden. The Euro’s strength dampened financial results, as did an economic downturn in Central Europe. The company faced increasing competition from hypermarkets, “do-it-yourself” retailers such as Walmart, and supermarkets that were expanding into home furnishings. Looking to the future, CEO Anders Dahlvig is stressing three areas for improvement: product assortment, customer service, and product availability. With stores in 38 countries, the company’s success reflects founder Ingvar Kamprad’s “social ambition” of selling a wide range of stylish, functional home furnishings at prices so low that the majority of people can afford to buy them. The store exteriors are painted bright blue and yellow: Sweden’s national colours. Shoppers view furniture on the main floor in scores of realistic settings arranged throughout the cavernous showrooms. At IKEA, shopping is a self-service activity; after browsing and writing down the names of desired items, shoppers can pick up their furniture on the lower level. There they find “flat packs” containing the furniture in kit form; one of the cornerstones of IKEA’s strategy is having customers take their purchases home in their own vehicles and assemble the furniture themselves. The lower level of a typical IKEA store also contains a restaurant, a grocery store called the Swede Shop, a supervised play area for children, and a baby care room. IKEA’s unconventional approach to the furniture business has enabled it to rack up impressive growth in an industry in which overall sales have been flat. Sourcing furniture from a network of more than 1,600 suppliers in 55 countries helps the company maintain its low-cost, high-quality position. During the 1990s, IKEA expanded into Central and Eastern Europe. Because consumers in those regions have relatively low purchasing power, the stores offer a smaller selection of goods; some furniture is designed specifically for the cramped living styles typical in former Soviet bloc countries. Throughout Europe, IKEA benefits from the perception that Sweden is the source of high-quality products and efficient service. Currently, Germany and the United Kingdom are IKEA’s top two markets. The United Kingdom represents the fastest-growing market in Europe. Although Britons initially viewed the company’s less-is-more approach as cold and “too Scandinavian,” they were eventually won over. IKEA currently has 18 stores in the United Kingdom and plans call for opening more in the next decade. As Allan Young, creative director of London’s St. Luke’s advertising agency, noted, “IKEA is anti-conventional. It does what it shouldn’t do. That’s the overall theme for all IKEA advertisements: liberation from tradition.” In 2005, IKEA opened two stores near Tokyo; more stores are on the way as the company expands in Asia. IKEA’s first attempt to develop the Japanese market in the mid-1970s resulted in failure. Why? As Tommy Kullberg, former chief executive of IKEA Japan, explained, “In 1974, the Japanese market from a retail point of view was closed. Also, from the Japanese point of view, I do not think they were ready for IKEA, with our way of doing things, with flat packages and asking the consumers to put things together and so on.” However, demographic and economic trends are much different today. After years of recession, consumers are seeking alternatives to paying high prices for quality goods. Also, IKEA’s core customer segment—post–baby boomers in their 30s—grew nearly 10 percent between 2000 and 2010. In Japan, IKEA offers home delivery and an assembly service option. Industry observers predict that North America will eventually rise to the number one position in terms of IKEA’s worldwide sales. The company opened its first U.S. store in Philadelphia in 1985; as of 2010, IKEA operated stores in 48 stores in North America. Plans call for opening at least several more U.S. stores each year through 2015. Goran Carstedt, former president of IKEA North America, described his target market by noting, “Our customers understand our philosophy, which calls for each of us to do a little in order to save a lot. They value our low prices. And almost all of them say they will come back again.” As one industry observer noted, “IKEA is on the way to becoming the Walmart Stores of the home-furnishing industry. If you’re in this business, you’d better take a look.” (Keegan & Green, 2014)

QUESTION >>

1. The process of global market segmentation begins with the choice of one or more variables to use as a basis for grouping customers. Companies such as IKEA should attempt to identify consumers in different countries who share similar needs and desires. By performing market segmentation, marketers can generate the insights needed to devise the most effective approach. Assess the variables that global marketers can use to segment global markets and give an example of each.

Q2
Impact Of Pandemic On Economy And Recovery Policy
Bernama Radio Bernama TV 08/04/2020 05:54 PM
By Dr Norlin Khalid
Apr 8, 2020 - KUALA LUMPUR (Bernama) – The coronavirus or COVID-19
outbreak, which is said to have originated at a wet market in Wuhan, China, has spread
all over the world like lightning and was categorised as a pandemic by the World
Health Organisation (WHO) on March 11. To date, the virus has infected over a
million people in more than 180 countries and caused over 80,000 deaths. In Malaysia
itself, more than 3,000 people have tested positive for COVID-19 and 63 people have
succumbed to it.
According to a study by JP Morgan and projections by WHO, Malaysia’s COVID-19
positive cases may peak in mid-April with over 6,000 people infected. The Malaysian
government has already taken proactive measures to curb its spread by imposing the
Movement Control Order (MCO) from March 18 to 31. However, the MCO period
was later extended to April 14. Although the MCO compliance stands at 95 percent,
case numbers and deaths are continuing to rise.
The COVID-19 pandemic will certainly have an impact on the global economy,
including Malaysia’s. COVID-19 has shocked the world economic structure which
is now in a state of uncertainty. Recently, the International Monetary Fund announced
that the pandemic will cause a global recession this year which could be worse than
the one triggered by the subprime mortgage crisis of 2008. The latter was caused by
the contraction of liquidity in the banking system in the United States after its real
estate bubble burst. The economic crisis ensuing from COVID-19 involves
practically all the countries of the world and recovery is expected to take a long time.
As long as new positive cases of infection are reported, the economic ecosystem will
continue to be disrupted. Studies by the Organisation for Economic Cooperation and
Development and World Bank have projected a 2.4 percent contraction in GDP
(Gross Domestic Product) growth for the world. Bloomberg reported zero percent or
negative GDP growth in the worst-case scenario.
COVID-19 will also have a negative impact on the labour market. The International
Labour Organisation has predicted that 25 million workers throughout the world may
lose their jobs. Malaysia, which is a small country dependent on other nations such as
the US and China, is also expected to feel the pinch. According to a report by the
Malaysian Institute of Economic Research, Malaysia’s GDP growth will contract by
2.61 percent in 2020. Bank Negara Malaysia (BNM) said in a recent statement that
Malaysia’s economic growth will be in the -2.0 percent to +0.5 percent range. It also
estimated that 951,000 people will lose their jobs. The Malaysian Global Innovation
and Creativity Centre predicted that about 40 percent of small- and medium-sized
enterprises will have to wind up their operations if the COVID-19 chain of infection
persists for three to six months.
CONFIDENTIAL BPA12403/BPA10103
CONFIDENTIAL
4
In the face of COVID-19, the government must focus on two objectives: one, focus
on the necessary protective and safety precautions to break the chain of infection and
two, reduce the negative economic effects by implementing recovery policies
involving active fiscal and monetary policy targets. The fiscal policy targets are
related to government spending and taxation while the monetary policies are related
to interest rates, liquidity and control of money supply.
In terms of fiscal policy, the government has announced a series of economic stimulus
packages to help individuals and companies affected by the COVID-19 crisis.
On March 19, the RM20 billion economic stimulus package (PRE 2020) was
launched to help industries that were directly hit by the first wave of the COVID-19
outbreak, such as hotels and transport companies. After the outbreak entered the
second wave and the MCO was imposed, more individuals and businesses were
impacted. The supply chain is disrupted because almost the entire sector has stopped
working. Some production firms have also stopped operations and worse still, laidoff
workers as they are unable to bear the costs. The PRIHATIN package is aimed at
easing the financial constraints of the people and businesses. On March 27, the
government announced the second RM250 billion economic stimulus package
PRIHATIN, which includes the RM20 billion from PRE 2020. Out of RM230 billion,
RM22 billion would come from a direct fiscal injection; RM100 billion (moratorium
in loan repayments); RM55 billion (guarantees); RM40 billion (withdrawal from
Employees Provident Fund); and RM13 billion (various sources). PRIHATIN’s main
objective is to protect the welfare of the people, support businesses and strengthen the
economy. However, the stimulus packages will cause the nation’s fiscal position to
worsen. To add to that, the global economic crisis has caused oil prices to tumble
down to US$25-US$30 a barrel. In comparison, oil prices were around US$60 a barrel
when Budget 2019 was tabled. When government revenue from oil drops, it will cause
an increase in deficits.
In terms of monetary policy, BNM has cut the Overnight Policy Rate or OPR by 25
basis points to 2.5 percent and reduced the statutory reserve requirement ratio or SRR
by 100 basis points to two percent. These cuts will reduce loan costs, improve
liquidity and stimulate economic activities. Apart from that, the restructuring and
rescheduling of the six-month moratorium will ensure that the capital and financial
market returns to stability. It will also help individuals and businesses facing financial
problems and liquidity constraints.
It is difficult to predict when the economy will fully recover as long as COVID-19
positive cases continue to rise and no vaccines are discovered to treat the disease.
Nevertheless, the government’s fiscal and monetary policies complement one another
and will help to revive the economy by increasing aggregate demand such as public
and private consumption and investment. This will help to stimulate economic growth
through the multiplier effect and reduce the hike in the unemployment rate.
https://www.bernama.com/en/features/news.php?id=1829686
CONFIDENTIAL BPA12403/BPA10103
CONFIDENTIAL
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(a) Examine the impact of COVID 19 pandemic on the Malaysian economy from
the aspects of unemployment and the wages of labor.

(b) To reduce the negative economic effects of COVID-19 pandemic, the
government is implementing recovery policies involving active fiscal and
monetary policy targets. The fiscal policy targets are related to government
spending and taxation while the monetary policies are related to interest rates,
liquidity and control of money supply. Analyze the implementation of expansionary fiscal policy and monetary policy
to stimulate aggregate demand (AD) in the economy during economic recession.

ABC Corp. provides its employees with a defined benefit pension plan. The company's actuary has provided you with the following information as of December 31, 2020: PBO $ 1,200,000 Fair Value Plan Assets 1,650,000 Current Service Cost 480,000 Interest Cost 48,000 PSC amortization 120,000 Expected and actual return on assets 165,000 In the past, contributions made to the pension plan have been equal to the pension expense for the corresponding year. The company has not made any contribution in 2020. In the statement of financial position as of December 31, 2020, ABC must report

a. a net pension asset of $ 1,650,000

b. a net pension debt of $ 78,000

c. a net pension debt of $ 450,000

d. a net pension asset of $ 450,000

1 Prepare the journal entries to set up the partnership as at 1 May 2020.

2 prepare a classified Balance Sheet of the partnership as at 1 May 2020.

Michelle and Peter form a partnership on 1 May 2020.

Michelle agrees to bring in $250,000 of cash.

Peter, who has been trading as a sole trader, is to invest certain business assets at agreed market valuations and also transfer his business liabilities.

Details of Peter’s assets and liabilities and their agreed valuations, are as follows:

On January 1, 2020, Winthrop Inc. entered into a lease agreement to lease equipment:

• 5-year lease term
• Annual lease payments are $10,000
• First payment is on January 1, 2020 and the other payments are on 31 December each year
• At the end of the lease the leased asset will revert to the lessor
• The asset’s economic life is estimated at 10 years
• Winthrop could have obtained equivalent financing from its bank at a rate of 5%
• Winthrop’s fiscal year end is December 31
• The equipment has a fair value of $70,000

Required:

1. Calculate the present value of the lease payments.
2. Prepare the amortization table.
3. Classify the lease agreement.
4. Prepare the journal entry(ies) for the lessee for the 2020 fiscal year related to the lease arrangement.

Mariner Corporation, which manufactures sail boats, ordered dry dock equipment from Brown Corporation. This equipment was built for the specialized needs of Mariner, and could not be used by any other company. Instead of purchasing the equipment, Mariner elected to enter into a long term lease agreement with Brown Co. The lease contract was signed on January 1, 2020.   It calls for 12 payments of $15,000, with the first one due on December 31, 2020. The lessor’s implicit interest rate is not known. Mariner’s incremental borrow rate is 8%.

a. Is this lease a finance or operating lease? Explain.

b. Present the journal entry to be made by Mariner when the lease is signed.

c. Show the journal entry that Mariner will make for the December 31, 2020 payment.

Mariner Corporation, which manufactures sail boats, ordered dry dock equipment from Brown Corporation. This equipment was built for the specialized needs of Mariner, and could not be used by any other company. Instead of purchasing the equipment, Mariner elected to enter into a long term lease agreement with Brown Co. The lease contract was signed on January 1, 2020. It calls for 12 payments of $15,000, with the first one due on December 31, 2020. The lessor’s implicit interest rate is not known. Mariner’s incremental borrow rate is 8%. a. Is this lease a finance or operating lease? Explain. b. Present the journal entry to be made by Mariner when the lease is signed. c. Show the journal entry that Mariner will make for the December 31, 2020 payment.

Headland Corp. purchased machinery on January 1, 2016 for $462,000. Straight-line depreciation is used. At the time management estimated that the machinery would be used over 10 years and would have a residual value of $41,000. It is now December 31, 2020 and management has determined that the machine’s life is now a total of 12 years with no residual value. No adjusting journal entries have been recorded yet for the 2020 year-end.

What journal entries are required to record the above events on December 31, 2020. (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.)

Shamrock Company reports pretax financial income of $76,100 for 2020. The following items cause taxable income to be different than pretax financial income.

Shamrock’s tax rate is 30% for all years, and the company expects to report taxable income in all future years. There are no deferred taxes at the beginning of 2020.

(a)

Compute taxable income and income taxes payable for 2020.