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Suggested Solution to Sundance Sporting Goods, Inc.
Note to Instructor: It is not necessary to assign the entire case problem. Parts a. and b.i. can
a. Below is the consolidated balance sheet for the MNC prepared according to the current rate
method prescribed by FASB 52. Note that the balance sheet balances. That is, Total Assets
Consolidated Balance Sheet for Sundance Sporting Goods, Inc. its Mexican and Canadian
Affiliates,
December 31, 2013: Pre-Exchange Rate Change (in 000 Dollars)
Sundance, Inc.
(parent)
Mexican
Affiliate
Canadian
Affiliate
Consolidated
Balance
Sheet
Assets
Cash $ 1,500 $ 430 $ 960 $ 2,890
Accounts receivable 2,100a849e1,200f4,149
Inventory 5,000 1,879 2,000 8,879
Investment in Mexican
affiliate
-b- - -
Long-term debt 9,000 2,121 1,840 12,961
Common stock 5,000 -b-c5,000
b,cThe investment in the affiliates cancels with the net worth of the affiliates in the consolidation.
eThe Mexican affiliate has sold on account A120,000 of merchandise to an Argentine import
house. This is carried on the Mexican affiliate’s books as Ps396,000 (= A120,000 x
Ps3.30/A1.00).
b. i. Below is presented the translation exposure report for the Sundance MNC. Note, from the
report that there is net positive exposure in the Mexican peso, Canadian dollar, Argentine
austral and Korean won. If any of these exposure currencies appreciates (depreciates) against
the U.S. dollar, exposed assets denominated in these currencies will increase (fall) in translated
Translation Exposure Report for Sundance Sporting Goods, Inc. and its Mexican and Canadian
Affiliates, December 31, 2013 (in 000 Currency Units)
Japanese
Yen
Mexican
Peso
Canadian
Dollar
Argentin
e
Austral
Korean
Won
Assets
Cash ¥ 0 Ps 1,420 CD 1,200 A 0 W 0
Accounts receivable 0 2,404 1,200 120 192,000
b. ii. The problem assumes that Canadian dollar depreciates from CD1.25/$1.00 to
CD1.30/$1.00 and that the Argentine austral depreciates from A1.00/$1.00 to A1.03/$1.00. To
From the translation exposure report we can determine that the depreciation in the
Canadian dollar will cause a
CD4,200,000
CD1.30 / $1.00 - CD4,200,000
CD1.25 / $1.00 = - $129,231
reporting currency imbalance.
Similarly, the depreciation in the Argentine austral will cause a
A120,000
A1.03 / $1.00 - A120,000
A1.00 / $1.00 = - $3,495
reporting currency imbalance.
c. The new consolidated balance sheet for Sundance MNC after the depreciation of the
Canadian dollar and the Argentine austral is presented below. Note that in order for the new
consolidated balance sheet to balance after the exchange rate change, it is necessary to have a
Consolidated Balance Sheet for Sundance Sporting Goods, Inc. its Mexican and Canadian
Affiliates,
December 31, 2013: Post-Exchange Rate Change (in 000 Dollars)
Sundance, Inc.
(parent)
Mexican
Affiliate
Canadian
Affiliate
Consolidate
d
Balance
Sheet
Assets
Cash $ 1,500 $ 430 $ 923 $ 2,853
Accounts receivable 2,100a845e1,163f4,108
Inventory 5,000 1,879 1,923 8,802
Total liabilities and net
worth
$35,465
a$2,500,000 - $400,000 (= Ps1,320,000/(Ps3.30/$1.00)) intracompany loan = $2,100,000.
b,cThe investment in the affiliates cancels with the net worth of the affiliates in the consolidation.
dThe parent owes a Japanese bank ¥126,000,000. This is carried on the books as $1,200,000
(=¥126,000,000/(¥105/$1.00)).
eThe Mexican affiliate has sold on account A120,000 of merchandise to an Argentine import
d. i. The transaction exposure report for Sundance, Inc. and its two affiliates is presented below.
The report indicates that the Ps1,320,000 accounts receivable due from the Mexican affiliate is
not also a translation exposure because this is netted out in the consolidation. However, the
Transaction Exposure Report for Sundance Sporting Goods, Inc. and
its Mexican and Canadian Affiliates, December 31, 2013
Affiliate Amount Account
Translation
Exposure
Parent Ps1,320,000 Accounts
Receivable
No
d. ii. Since transaction exposure may potentially result in real cash flow losses while translation
exposure does not have an immediate direct effect on operating cash flows, we will first address
The parent firm can pay off the ¥126,000,000 loan from the Japanese bank using funds
from the cash account and money from accounts receivable that it will collect. Additionally, the
parent firm can collect the accounts receivable of Ps1,320,000 from its Mexican affiliate that is
carried on the books as $400,000. In turn, the Mexican affiliate can collect the A120,000
The elimination of these transaction exposures will affect the translation exposure of
Sundance MNC. A revised translation exposure report follows.
Revised Translation Exposure Report for Sundance Sporting Goods, Inc. and its Mexican and
Canadian Affiliates, December 31, 2013 (in 000 Currency Units)
Japanese
Yen
Mexican
Peso
Canadian
Dollar
Argentine
Austral
Korean
Won
Assets
Cash ¥ 0 Ps 484 CD 1,512 A 0 W 0
Accounts
0 2,404 1,200 0 0
Long-term debt 0 7,000 2,300 0 0
Exposed
liabilities
¥ 0 Ps12,380 CD6,300 A 0 W 0
Net exposure ¥ 0 Ps 7,908 CD4,512 A 0 W 0
Note from the revised translation exposure report that the elimination of the transaction
exposure will also eliminate the translation exposure in the Japanese yen, Argentine austral and
The remaining translation exposure can be hedged using a balance sheet hedge or a
derivatives hedge. Use of a balance sheet hedge is likely to create new transaction exposure,
