This document discusses several international issues in management accounting. It begins by noting that management accounting practices that work in a company's home country may not work in other countries due to differences in political, legal and cultural environments. A foreign trade zone is described as an area within the US that is considered outside of US commerce for tariff purposes, allowing postponed duty payments. Outsourcing work to lower-wage countries is discussed, as are joint ventures and maquiladoras. The document also covers exchange rates, currency risk, appreciation and hedging strategies. Sample problems are provided at the end related to transfer pricing between divisions.
Nilai saham merupan nilai yang dimiliki oleh selsmbar saham di pasar modal. nilai saham terdiri dari tiga nilai, yaitu : nilai buku, nilai pasar, dan nilai intrinsik
Konsep dasar akuntansi manajemen terdiri dari konsep pembebanan biaya yang mana menujukkan bagaimana suatu biaya dibebankan pada suatu produk, konsep definisi biaya produk baik produk berwujud (tangible) dan tidak berwujud (intangible), konsep pelaporan eksternal yang menujukkan bagaimana biaya-biaya tersebut disajikan dalam laporan keuangan dan konsep sistem akuntansi manajemen yang terbagi atas dua jenis, yaitu system akuntansi manajemen berdasarkan fungsional dan aktivitas.
Nilai saham merupan nilai yang dimiliki oleh selsmbar saham di pasar modal. nilai saham terdiri dari tiga nilai, yaitu : nilai buku, nilai pasar, dan nilai intrinsik
Konsep dasar akuntansi manajemen terdiri dari konsep pembebanan biaya yang mana menujukkan bagaimana suatu biaya dibebankan pada suatu produk, konsep definisi biaya produk baik produk berwujud (tangible) dan tidak berwujud (intangible), konsep pelaporan eksternal yang menujukkan bagaimana biaya-biaya tersebut disajikan dalam laporan keuangan dan konsep sistem akuntansi manajemen yang terbagi atas dua jenis, yaitu system akuntansi manajemen berdasarkan fungsional dan aktivitas.
Contents
Issues 2
Facts 3
Analysis 4
Conclusions 9
Issues
1. How the company should treat the record of buying materials with different currencies?
2. How the company should treat the record of sales with different currencies?
3. What risk have this company associates with their direct sale in a foreign country with different currency?
4. Why might a company want its stock listed on a stock exchange outside of its home country?
5. Why might a company be interested in investing in an operation in a foreign country (foreign direct investment)?
Facts
Besserbrau AG is a German beer producer headquartered in Ergersheim, Bavaria. The company, which was founded in 1842 by brothers Hans and Franz Besser, is publicly traded, with shares listed on the Frankfurt Stock Exchange. Manufacturing in strict accordance with the almost 500-year-old German Beer Purity Law, Besserbrau uses only four ingredients in making its products: malt, hops, yeast, and water. While the other ingredients are obtained locally, Besserbrau imports hops from a company located in the Czech Republic. Czech hops are considered to be among the world’s finest. Historically, Besserbrau’s products were marketed exclusively in Germany. To take advantage of a potentially enormous market for its products and expand sales, Besserbrau began making sales in the People’s Republic of China three years ago. The company established a wholly owned subsidiary in China (BB Pijio) to handle the distribution of Besserbrau products in that country. In the most recent year, sales to BB Pijio accounted for 20 percent of Besserbrau’s sales, and BB Pijio’s sales to customers in China accounted for 10 per-cent of the Besserbrau Group’s total profit. In fact, sales of Besserbrau products in China have expanded so rapidly and the potential for continued sales growth is so great that the company recently broke ground on the construction of a brewery in Shanghai, China. To finance construction of the new facility, Besserbrau negotiated a listing of its shares on the London Stock Exchange to facilitate an initial public offering of new shares of stock.
Analysis
1- How the company should treat the record of buying materials with different currencies?
The company on this study case use materials from another country and this situation make the company keep certain accounting records that could help them describe this reality.
The company should record the account payable of the hops in Euros if that is possible an the dilemma associated to the exchange in the foreign country currency will be out of the picture but since maybe this could not be the case the company should record the account payable for the value of the invoice at the present currency exchange rates and by the time of the contract payment adjust the journal entry adding the loss or gain in foreign currency exchange.
An important rule of accounting is that your balance sheet and income statement must be reported in your home curre.
Its your third week on the job at Panache Inc. Last week, you made.pdfinfo309708
It\'s your third week on the job at Panache Inc. Last week, you made sure all investment
transactions for trading, available-for-sale, held-to-maturity, and equity securities were properly
recorded. You are reviewing the financial statement reporting for the securities and have found a
newspaper clipping dated December 31 that indicates the price of the stock of Omni company
had dropped the day before because of the company\'s severe financial difficulties. While the
company is not expected to fail, the article states the earnings of the company have permanently
declined due to changes in the new-homes market. You do a quick check of the stock price on
that day and find that the stock closed at $8 per share. Panache owns 10,000 shares of Omni\'s
stock as an available-for-sale security. The original cost of the stock was $20 per share, and the
fair value at the last reporting date (September 30, 2016) was $15 per share. You have just begun
to write a memo to the president of the company, Mr. Cartwright, about this investment when he
stops by your office and says, \"I have a question for you.\" He says, \"As you know, we use a
special metal called tellurium in our cars. It takes 10 pounds for each car we build. I had a
feeling last summer that tellurium prices were going to go up in October, so Mr. Brown told me
he could lock the prices in by using a dirigible. Did he do that?\" \"It was probably a derivative,
Mr. Cartwright,\" you reply. \"Let me look through the files and see what I can find, and I\'ll get
back to you. I\'ll include my findings in the memo I\'m writing to you about another
investment.\" You locate a file labeled tellurium futures, and inside you find several documents.
The first one is a handwritten note dated August 31, 2015, that says: Agreed to tellurium futures
contract expiring December 31, 2015; agreement gives Panache the right to purchase 2,000
pounds of tellurium at a price of $500 per pound. Signed, C. Brown 8/31/2015. The second paper
is a schedule showing prices of tellurium: Date Price 8/31/2015 $500 9/30/2015 $530
10/31/2015 $550 The third document is an invoice for the purchase of 2,000 pounds of tellurium
on October 31 at $550 per pound. There is a note on the invoice in Ms. Brown\'s handwriting
that says: Settled futures contract today. C. Brown 10/31/2015. You know that tellurium
purchased in October would have been used to produce the 200 cars made in November. The
cars produced in November were sold in December for $15,000 each. The total cost to produce
the cars was $12,000 each. You are required to: Prepare all journal entries that should have been
recorded related to the futures contract, including any entries needed for the September 30, 2016,
financial statements; the purchase of the tellurium; and the sale of the cars in December. Create
the journal entries in an Excel spreadsheet. Write a 2-page memo to Mr. Cartwright that
includes: A discussion of the investment in Omni company stock and the requir.
Konsep Balanced Score Card. Penilaian kinerja dilihat dari 4 perspektif yaitu perspektif keuangan, konsumen, learn and growth dan proses bisnis internal.
Makalah Analisis PT Kereta API Indonesia . membahas analisis strategik dalam perusahaan kereta api, dimana dampak peraturan harga pesawat tidak ada penetapan batas bawah maka kereta api berdampak.
Makalah Analisis PT Kereta API Indonesia . membahas analisis strategik dalam perusahaan kereta api, dimana dampak peraturan harga pesawat tidak ada penetapan batas bawah maka kereta api berdampak.
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The Evolution of Non-Banking Financial Companies (NBFCs) in India: Challenges...beulahfernandes8
Role in Financial System
NBFCs are critical in bridging the financial inclusion gap.
They provide specialized financial services that cater to segments often neglected by traditional banks.
Economic Impact
NBFCs contribute significantly to India's GDP.
They support sectors like micro, small, and medium enterprises (MSMEs), housing finance, and personal loans.
BYD SWOT Analysis and In-Depth Insights 2024.pptxmikemetalprod
Indepth analysis of the BYD 2024
BYD (Build Your Dreams) is a Chinese automaker and battery manufacturer that has snowballed over the past two decades to become a significant player in electric vehicles and global clean energy technology.
This SWOT analysis examines BYD's strengths, weaknesses, opportunities, and threats as it competes in the fast-changing automotive and energy storage industries.
Founded in 1995 and headquartered in Shenzhen, BYD started as a battery company before expanding into automobiles in the early 2000s.
Initially manufacturing gasoline-powered vehicles, BYD focused on plug-in hybrid and fully electric vehicles, leveraging its expertise in battery technology.
Today, BYD is the world’s largest electric vehicle manufacturer, delivering over 1.2 million electric cars globally. The company also produces electric buses, trucks, forklifts, and rail transit.
On the energy side, BYD is a major supplier of rechargeable batteries for cell phones, laptops, electric vehicles, and energy storage systems.
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The European Unemployment Puzzle: implications from population agingGRAPE
We study the link between the evolving age structure of the working population and unemployment. We build a large new Keynesian OLG model with a realistic age structure, labor market frictions, sticky prices, and aggregate shocks. Once calibrated to the European economy, we quantify the extent to which demographic changes over the last three decades have contributed to the decline of the unemployment rate. Our findings yield important implications for the future evolution of unemployment given the anticipated further aging of the working population in Europe. We also quantify the implications for optimal monetary policy: lowering inflation volatility becomes less costly in terms of GDP and unemployment volatility, which hints that optimal monetary policy may be more hawkish in an aging society. Finally, our results also propose a partial reversal of the European-US unemployment puzzle due to the fact that the share of young workers is expected to remain robust in the US.
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If you are interested in selling your pi coins, i have a verified pi merchant, who buys pi coins and resell them to exchanges looking forward to hold till mainnet launch.
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Chapter 18 International Issues In Management Accounting
1. 661133
CHAPTER 18
INTERNATIONAL ISSUES IN
MANAGEMENT ACCOUNTING
QUESTIONS FOR WRITING AND DISCUSSION
1. Differences among countries in terms of the
political, legal, and cultural environment can
all affect the firm. The management accoun-
tant may find that practices that work well in
the home country do not work as well (or at
all) in other countries. It is necessary for the
management accountant to be aware of all
facets of business and to be knowledgeable
and creative in applying accounting con-
cepts in various business environments.
2. A foreign trade zone is an area that is physi-
cally on U.S. soil but is considered to be
outside U.S. commerce. As a result, goods
imported into a foreign trade zone are free of
tariff or duty until they leave the zone.
Therefore, companies located in a foreign
trade zone can postpone payment of tariff
and the associated loss of working capital.
Additionally, the company does not pay duty
on defective materials or inventory that has
not been included in the finished product.
3. Outsourcing is the payment by a company
for a business function that was formerly
done in-house. In an international context,
outsourcing refers to the location of busi-
ness functions in another country. Frequent-
ly, the work outsourced is to a lower-wage
country. The company receives a compara-
ble quality of work but at a lower cost.
4. Joint ventures are partnerships between two
or more companies. The enterprise is co-
owned. A company may find joint ventures
advantageous when another company has
expertise that the first company lacks. In ad-
dition, restrictions by certain countries on
foreign ownership of business may mean
that a joint venture is the only avenue open
to a company wishing to expand into the
foreign country.
5. Maquiladoras are manufacturing plants lo-
cated in Mexico that process imported mate-
rials and reexport them to the United States.
Maquiladoras are exempt from Mexican
laws governing ownership, and the U.S.
government grants exemptions from or re-
ductions in custom duties levied on reex-
ported goods. Many U.S. firms have em-
braced the maquiladora because of the low-
cost labor, the flexible ownership structure,
and the opportunity to locate close to an in-
creasingly important Mexican market.
6. The exchange rate is the amount for which
one currency can be traded for another. The
spot rate is the exchange rate in effect at the
current time. There are also future exchange
rates, which describe the rates in effect for
future delivery.
7. These three types of risk relate to the impact
on the firm of changing exchange rates.
Transaction risk refers to the possibility that
future cash transactions will be affected by
changing exchange rates. Economic risk re-
fers to the possibility that a firm’s present
value of future cash flows can be affected by
exchange fluctuations. Translation risk is the
degree to which a firm’s financial statements
are exposed to exchange rate fluctuations.
8. Currency appreciation means that the home
country’s currency strengthens against anoth-
er currency. In other words, one unit of the
home currency purchases more units of
another currency than it did previously. Cur-
rency appreciation makes the products of a
foreign country cheaper than before, and
thus, it is easier for a company in the home
country to import goods.
9. Currency appreciation makes the home
country currency more expensive to foreign
customers, thereby making the products of
the home country firm more expensive than
they were before. For example, if the ex-
change rate is one home country unit to one
foreign country unit and the currency appre-
ciates, then the exchange rate might be-
come one home country unit to two foreign
units. That is, the home country unit buys
more foreign currency as it appreciates. Put
differently, the foreign currency buys less as
the home country currency appreciates.
10. If Mexico devalues the peso, a dollar will buy
relatively more pesos, making the cost of
2. 661144
Mexican labor cheaper. As the controller,
you will revise your estimates of labor costs
in the maquiladora downward. The proposed
new production facility will be more attrac-
tive.
As a local labor union leader, you would be
displeased by the potential devaluation. If
Mexican wages go down relative to U.S.
wages, Mexican labor will be relatively more
attractive, and more jobs may be outsourced
to Mexico.
11. Hedging is a way of insuring against gains
and losses on foreign currency exchange.
The company that imports the material may
be afraid that the exchange rate will change
in 90 days and that the home currency will
weaken against the foreign currency. In that
case, the company may hedge by purchas-
ing a forward contract for the foreign curren-
cy, thereby locking in the exchange rate and
insuring against adverse exchange rate fluc-
tuations.
12. Disagree. The manager of a subsidiary
should not be evaluated on the basis of fac-
tors over which he or she has no control.
These factors may include transfer prices,
currency fluctuations, local taxes, and so on.
The subsidiary manager should be eva-
luated on the basis of revenues and costs.
13. Environmental factors that may affect the
performance of divisional managers include
economic, legal, political, social, and educa-
tional variables.
14. Internal Revenue Code Section 482 outlines
the transfer pricing methods acceptable for
income tax purposes. The four acceptable
methods are the comparable uncontrolled
price method, the resale price method, the
cost-plus method, and any method jointly
acceptable to the IRS and the company.
3. 661155
EXERCISES
18–1
Your friend will take the traditional accounting and business courses required for
a major in accounting. Naturally, these would include international business
courses, such as international accounting and international finance. In addition,
she/he would be well advised to take classes relating to other cultures, including
history, philosophy, literature, and foreign language(s). No individual class is crit-
ical; instead, it is the sum of the classes that is important. In other words, your
friend will learn a little about other countries in each class. Over time, that little bit
will add up, giving your friend the background to understand business practices
overseas and to fit business transactions into a cultural context.
Suppose your friend is just about to graduate and cannot afford to spend more
time in college? Then she/he should do what all management accountants need
to do—stay up to date by reading books and articles in a variety of international
business areas, including information systems, marketing, management, politics,
and economics.
Note to Instructors: Your students may want to read Daniel M. Hrisak’s “Global
Challenges Call for More CMAs and CFMs,” Strategic Finance (June 2001): pp.
44–49.
18–2
1. e
2. b
3. d
4. c
5. a
18–3
1. e
2. c
3. d
4. b
5. a
4. 661166
18–4
1. $14,200,000 × 0.30 = $4,260,000
2. $4,260,000 × 9/12 × 0.10 = $319,500
18–5
1. $14,200,000 × 0.85 × 0.30 = $3,621,000
2. Savings = ($4,260,000 – $3,621,000) + $319,500
= $639,000 + $319,500 = $958,500
18–6
Tariff savings = ($3,750,000 × 0.06 × 0.25) = $56,250 per year
Because broken items will never be sold outside the foreign trade zone, Bulwar
will not owe a tariff on them.
18–7
1. 70,100 pesos/10.9 = $6,431
2. 70,100 pesos/11.4 = $6,149
3. There is an exchange gain of $282 ($6,431 – $6,149).
5. 661177
18–8
1. 75,000/10.9 = $6,881
2. 75,000/11.4 = $6,579
3. Exchange loss = $6,881 – $6,579 = $302
4. Hedging contract = 75,000/11.1 = $6,757
Premium expense = $6,881 – $6,757 = $124
5. Net savings = $302 – $124 = $178
18–9
1. The dollar weakened against the euro (€) from June 1 to September 1. On
June 1, one dollar would buy €0.833 (1/1.20). On September 1, one dollar
would buy €0.794 (1/1.26).
2. On June 1, Basu would need $720,000 to pay for the purchase.
€600,000 × 1.20 = $720,000
On September 1, Basu would need $756,000 to pay for the purchase.
€600,000 × 1.26 = $756,000
18–10
There was an exchange loss of $36,000, calculated as follows:
Liability in dollars on June 1 $ 720,000
Payment in dollars on September 1 (756,000)
Exchange loss $ 36,000
6. 661188
18–11
1. Persephone Company engaged in a forward contract to buy Canadian dollars
for U.S. dollars. In other words, on September 30, Persephone expects to pay
120,000 Canadian dollars. Therefore, it needs to exchange U.S. dollars for Ca-
nadian dollars on September 30. The forward contract allows it to buy the
120,000 Canadian dollars at a specified forward rate of Canadian dollars for
U.S. dollars.
Had Persephone Company expected to receive Canadian dollars from the Ca-
nadian company, it would have engaged in a forward contract to sell Cana-
dian dollars on September 30 instead.
2. Because Persephone hedges all currency exchanges, the forward rate is the
applicable exchange rate. Persephone will buy 120,000 Canadian dollars on
September 30 for $92,308.
120,000/1.30 = Canadian $ 92,308
18–12
You are delighted—the dollar has appreciated and now buys more euros than it
did before. The car costs € 90,000, which translates to $107,143 at the € 0.84 to $1
rate (90,000/0.84 = $107,143). At the new exchange rate, only $102,273
(90,000/0.88) is required to purchase € 90,000. Have a good trip!
18–13
Market price $45.00
Add: Shipping, duties 12.20
Less: Marketing costs (4.50)
Transfer price $52.70
7. 661199
18–14
$80 = Cost + 0.25 Cost
$80 = 1.25 Cost
Cost = $64
Therefore, the transfer price is $64
18–15
1. Mexican division’s ROI = $150,000/$1,500,000 = 10.0%
British division’s ROI = $230,000/$2,000,000 = 11.5%
2. No, we cannot directly compare the two divisions’ ROIs without knowing
more about the cultural and environmental factors faced by each.
18–16
1. The maximum transfer price is $200, because the Singapore plant could pur-
chase the motor externally for that price.
2. The minimum transfer price is $195, because that is equal to the total variable
cost of $195.
3. The environmental factor most important to this decision is the governmental
prohibition against layoffs. This could turn direct labor into a strictly fixed
cost. This particular prohibition is a serious one.
Some Spanish plants have been virtually closed for years, yet the firms must
continue to pay the workers because the government has refused permission
to lay off the workers.
8. 662200
18–17
1. The comparable uncontrolled price method should be used because a market
price exists.
2. Market price $30.00
Add: Shipping, duties 5.05
Less: Marketing costs (4.00)
Transfer price $31.05
18–18
1. c
2. a
3. b
4. a
5. d
6. e
7. e
9. 662211
PROBLEMS
18–19
1. a. Factors that generally determine the degree of decentralization in an or-
ganization include the following:
• Physical proximity of the organization’s divisions.
• Philosophy of top-level management to commit to delegating authority
and allowing decentralized decision making.
• Importance, materiality, time constraints, and risk level of decisions.
b. Benefits to be derived from decentralization include:
• Increased growth of the organization because decisions can be made by
more individuals closer to the operations, thus reducing pressure on
and allowing ample time for top-level management to deal with strategic
and long-range planning issues.
• More flexibility and timelier decision making in a rapidly changing envi-
ronment.
c. Disadvantages of decentralization include:
• More control features required at company headquarters to monitor di-
visions/subsidiaries.
• Loss of some control as central authority is reduced.
• Greater pressure in allocating pooled resources.
• Duplication of support functions.
2. The factory currently owned and operated by LSI in Nuevo Laredo is a maqui-
ladora. LSI is already well acquainted with the customs of doing business in
Mexico and should have relatively little difficulty expanding its operations.
The passage of the North American Free Trade Agreement makes LSI’s ex-
pansion simpler by further easing Mexican laws governing foreign ownership.
It also means that the current special U.S. customs treatment of reimported
goods would continue. In general, NAFTA creates a more hospitable envi-
ronment for U.S. companies expanding production in Mexico.
10. 662222
18–20
Alternative 1:
Advantages: This alternative involves working with a well-understood
process in a well-understood environment. Beryl is completely familiar with
the legal and social environment in Minnesota. Morale may increase because
all workers will receive the higher wages. The factory is already set up, sup-
pliers are in line, and the company knows just how long it takes to produce
the fax machines.
Disadvantages: Additional workers who are not trained in Paladin’s process
would need to be hired. Heavier use of plant facilities will wear out plant and
equipment faster. The addition of a second shift may cause labor problems
because those workers assigned to the second shift may want to work on the
more desirable first shift.
Alternative 2:
Advantages: Wages are much lower in Mexico. The burgeoning Mexican mar-
ket would provide demand for Paladin’s product. Production in Mexico would
satisfy Mexican demands for locally produced goods.
Disadvantages: Paladin has no experience in Mexico. There is considerable
uncertainty regarding the training of Mexican workers and the start-up costs
of building a new plant. Language and cultural differences may cause difficul-
ties.
Alternative 3:
Advantages: Location of a new plant in a foreign trade zone would save on
duty-related costs. There is no language difference in Dallas. The opening of
a plant in the Southwest would give Paladin easier access to markets in the
southern and southwestern United States. Wages would be lower than those
in Minnesota.
Disadvantages: The Dallas plant is a considerable distance from the Minneso-
ta plant, requiring another layer of management. Beryl may find it difficult to
run both plants herself.
11. 662233
18–21
1. Using the spot rates in effect on July 1, the following prices can be set in
francs and yen:
Swiss order: $64,000 × 1.2360 = 79,104 Swiss francs
Japanese order: $124,000 × 117.70 = 14,594,800 yen
2. On October 1, the Swiss customer should pay Custom Shutters 79,104 Swiss
francs. If the 90-day forward rate anticipated on July 1 holds, Custom Shut-
ters will receive $62,831 (79,104/1.2590).
On October 1, the Japanese customer should pay Custom Shutters
14,594,800 yen. If the 90-day forward rate anticipated on July 1 holds, Custom
Shutters will receive $124,000.
Will Lee actually receive $186,831 ($62,831 + $124,000) on October 1? We
don’t know. It depends on the exchange rates in effect on October 1. Current-
ly, it is expected that the dollar will weaken against the Swiss franc and stay
unchanged against the yen. However, this could change. If Lee is bothered by
the uncertainty, he could hedge by locking in the exchange rates now. That
would guarantee the $186,831 on October 1. He might want to do that since
the anticipated trend is steadily upward for Swiss francs and the Swiss cus-
tomer could very well pay late.
12. 662244
18–22
Your objective in meeting with the IRS representative is to demonstrate that the
$10 transfer price negotiated between the European and U.S. divisions is accept-
able under Internal Revenue Code Section 482.
Comparable uncontrolled price method:
Market price (U.S.) $14.00
Add: Landing costs 2.50
Less: Variable marketing costs (1.80)
Transfer price $14.70
Clearly, your problem is that the comparable uncontrolled price method gives a
higher transfer price than the one negotiated. The problem with the above compu-
tation, of course, is that it assumes that you can sell additional units of the com-
ponent for $14 within the United States. You can’t. If there were a buyer for addi-
tional units at $14 per unit, the U.S. division would gladly sell them. As it is, the
U.S. division has substantial excess capacity. The $10 transfer price covers all
incremental costs of production plus the landing costs. Thus, a more valuable
computation would be the following:
Negotiated transfer price $ 10.00
Less:
Variable costs of production (7.00)
Landing costs (2.50)
Profit per unit $ 0.50
You can also point out that there is a market for this component in Europe, and
that given this fact, the negotiated transfer price has the feel of an arm’s-length
transaction. That is, both the U.S. and the European divisions are acting in their
own best interests.
13. 662255
18–23
1. Comparable uncontrolled price method:
Belgium Canada
Market price $430 $430
Add: Shipping 30 25
Less: Avoidable marketing cost (40) (40)
Transfer price $420 $415
2. No, the IRS will have no problem with the $430 charged to the Belgian and
Canadian divisions. This price exceeds the comparable uncontrolled price.
One might wonder why Audio-Tech has set such a high transfer price to the
foreign divisions. The reason is that both Canada and Belgium have higher
corporate income tax rates than the United States. Therefore, Audio-Tech
wants to take as much profit as possible in the United States and as little
profit as possible in the two foreign countries. Currently, the tax departments
in Canada and Belgium have not targeted transfer pricing as an important
problem.
14. 662266
MANAGERIAL DECISION CASES
18–24
1. Some might argue that the company has an obligation to pay no more than its
minimum legal tax. The actions taken by the company were clearly intended
to escape taxation. Avoidance of taxes is acceptable, evasion is not. And
perhaps auditors would not find anything that would signal any deviation
from the legal guidelines. After all, this had been done in the past with great
success. Nonetheless, the propriety of the actions taken by the firm is ques-
tionable. It was made quite clear that under normal operating conditions,
transfer prices were set by divisional managers. Thus, the incentive for tam-
pering with the transfer prices appears to be motivated by expected losses
for the U.S. operations. The only purpose of increasing the transfer prices
was to reduce European taxes that normally would be owed and paid. This
creates some suspicion about the ethical content of the transfer pricing deci-
sion. This suspicion is strengthened by the act of reassigning so-called legi-
timate costs to support the planned increase in transfer prices. If the costs
are really that legitimate, why were they not discovered until the prospect of
losses appeared? The behavior displayed by the top executives is not ethical.
Debbie is not directly involved in the decision but should consider whether
she wants to continue working for a company that engages in this kind of
manipulation.
2. Accountants have a responsibility to “perform professional duties in accor-
dance with relevant laws, regulations, and technical standards.” (I-2) Fur-
thermore, they have a responsibility to “abstain from engaging in or support-
ing any activity that would discredit the profession.” (III-3) Finally, they must
“disclose all relevant information that could reasonably be expected to influ-
ence an intended user’s understanding of the reports, analyses, or recom-
mendations presented.” (IV-2) One wonders how willing and how comfortable
the management and accountants responsible for the scheme would be in re-
vealing the reassignment of costs and the reasons thereof. If tax accountants
are asked to be involved in a questionable scheme, they should clearly refuse
to do so.
15. 662277
18–25
1. The price is unacceptable because it is less than the adjusted market price of
$12.00 ($10 + $2.50 – $0.50). By setting a transfer price lower than the IRS
guideline, revenues recognized in the United States are lower than they
should be, and less taxes are paid than required. The IRS could reallocate in-
come (by requiring a transfer price of $12). If the transfer price were greater
than $12, the IRS would have no concern, since the company would be paying
more taxes than expected.
2. Resale price – Cost = 0.25(Resale price)
$8.00 – Cost = 0.25($8.00)
Cost = $6.00
Thus, if the normal markup is 25 percent, the allowable cost without adjust-
ment is $6.00. Adding to this the landing cost of $1.20, the allowable transfer
price is $7.20. Thus, the price of $4.50 is certainly unacceptable as far as the
U.S. taxing authorities would be concerned. The transfer price should be in-
creased to $7.20.
3. Minimum: $6.00 + $2.00 – $1.25 = $6.75
Maximum: $12.00 (local price for the European division)
The maximum transfer price is less than the Internal Revenue Code Section
482 comparable uncontrolled price ($12.75 = $12.00 + $2.00 – $1.25). If the
joint benefit of $5.25 ($12.00 – $6.75) is split equally, the transfer price would
be $9.38 ($2.63 + $6.75). The company could justify the $9.38 transfer price by
arguing that the company has idle capacity, which would otherwise produce
no revenues. This argument would be strengthened if the buying division
does not normally buy this component from the selling division or if the price
concession is necessary to induce the internal acquisition. The presence of
decentralized decision making could also strengthen the argument. If divi-
sional managers are free to set prices and free to buy from whichever source
is best and evidence exists that they do both, then the company could argue
that the negotiated outcome is an arm’s-length transaction.
RESEARCH ASSIGNMENT
18–26
Answers will vary.