PROBLEM 15.1A Exchange Rates and Export Decision

Crackle Cookie Company is a relatively new company and so far has sold its products only in its home country, Denmark. In December, Crackle determined that it had excess capacity to produce more of its special Christmas cookies. It is trying to decide whether to use that capacity to ship a batch of cookies overseas. The marketing department has determined that the United States and Great Britain are the two most viable markets. Crackle has enough excess capacity to produce only one batch, which can be shipped to either country. The materials and labor cost to produce the batch amount to 8,500 kroner. The marketing department, which located a U.S. shipping company that could deliver to either location, also provided the following information.

	United States	Great Britain
Shipping cost	3,000 U.S. dollars	2,000 U.S. dollars
Duties/customs charges and miscellaneous selling expenses	400 U.S. dollars	480 British pounds
Total sales revenue	5,200 U.S. dollars	2,800 British pounds
Exchange rate data	1 krone = 0.166 U.S. dollars	1 krone = 0.115 British pounds

Instructions

1. If Crackle exports the batch to the United States, what is its estimated profit/loss in Danish kroner?
2. If Crackle exports the batch to Great Britain, what is its estimated profit/loss in Danish kroner?
3. If the British pound has exhibited rather large fluctuations relative to the Danish krone recently, how might this impact Crackles decision as to which country to ship to?

PROBLEM 15.6A A Comprehensive Problem: Journalizing Exchange Rate Effects

Wolfe Computer is a U.S. company that manufactures portable personal computers. Many of the components for the computer are purchased abroad, and the finished product is sold in foreign countries as well as in the United States. Among the recent transactions of Wolfe are the following:

Oct. 28	Purchased from Mitsutonka, a Japanese company, 20,000 disk drives. The purchase price was 180,000,000, payable in 30 days. Current exchange rate, $0.0105 per yen. (Wolfe uses the perpetual inventory method; debit the Inventory of Raw Materials account.)
Nov. 9	Sold 700 personal computers to the Bank of England for 604,500 due in 30 days. The cost of the computers, to be debited to the Cost of Goods Sold account, was $518,000. Current exchange rate, $1.65 per British pound. (Use one compound journal entry to record the sale and the cost of goods sold. In recording the cost of goods sold, credit Inventory of Finished Goods.)
Nov. 27	Issued a check to Inland Bank for $1,836,000 in full payment of account payable to Mitsutonka.
Dec. 2	Purchased 10,000 gray-scale monitors from German Optical for 1,200,000, payable in 60 days. Current exchange rate, $0.7030 per euro. (Debit Inventory of Raw Materials.)
Dec. 9	Collected dollar-equivalent of 604,500 from the Bank of England. Current exchange rate, $1.63 per British pound.
Dec. 11	Sold 10,000 personal computers to Computique, a Swiss retail chain, for SFr23,750,000, due in 30 days. Current exchange rate, $0.6000 per Swiss franc. The cost of the computers, to be debited to Cost of Goods Sold and credited to Inventory of Finished Goods, is $7,400,000.

Instructions

1. Prepare in general journal form the entries necessary to record the preceding transactions.
2. Prepare the adjusting entries needed at December 31 for the 1,200,000 account payable to German Optical and the SFr23,750,000 account receivable from Computique. Year-end exchange rates, $0.7000 per euro and $0.5980 per Swiss franc. (Use a separate journal entry to adjust each account balance.)
3. Compute (to the nearest dollar) the unit sales price of computers in U.S. dollars in either the November 9 or December 11 sales transaction. (The sales price is the same in each transaction.)
4. Compute the exchange rate for the yen, stated in U.S. dollars, on November 27.