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Translated Translated
Euros Exchange Rate Accounts Exchange Rate Accounts
Assets Statement (US$/euro) US dollars (US$/euro) US dollars
Cash 1,600,000 1.2000 1,920,000$ 0.9000 1,440,000$
Accounts receivable 3,200,000 1.2000 3,840,000 0.9000 2,880,000
Inventory 2,400,000 1.2000 2,880,000 0.9000 2,160,000
Net plant & equipment 4,800,000 1.2000 5,760,000 0.9000 4,320,000
Total 12,000,000 14,400,000$ 10,800,000$
Liabilities & Net Worth
Accounts payable 800,000 1.2000 960,000$ 0.9000 720,000$
Short-term bank debt 1,600,000 1.2000 1,920,000 0.9000 1,440,000
Long-term debt 1,600,000 1.2000 1,920,000 0.9000 1,440,000
Common stock 1,800,000 1.2760 2,296,800 1.2760 2,296,800
Retained earnings 6,200,000 1.2000 7,440,000 1.2000 7,440,000
CTA account (loss) - (136,800)$ (2,536,800)$
Total 12,000,000 14,400,000$ 10,800,000$
(2,536,800)$
136,800
a. The translation gain (loss) is ----------------------------------------------------------------------------------------------------------------> (2,400,000)$
b. The translation gain (loss) for the year is added to the balance in the Cumulative Translation adjustment account, which is carried as a separate balance
sheet account within the equity section of the consolidated balance sheet. The loss does not pass through the income statement under the Current Rate
Method, in which the currency of the foreign subsidiary is local currency functional.
Problem 11.1 Ganado Europe (A)
Using facts in the chapter for Ganado Europe, assume the exchange rate on January 2, 2006, in Exhibit 11.4 dropped in value from $1.2000/€ to $0.9000/€
(rather than to $1.0000/€). Recalculate Ganado Europe’s translated balance sheet for January 2, 2006 with the new exchange rate using the current rate
method.
a. What is the amount of translation gain or loss?
b. Where should the translation gain or loss appear in the financial statements?
Translation Using the Current Rate Method: euro depreciates from $1.2000/euro to $0.9000/euro.
Just before devaluation
Just after devaluation
Translated Translated
Euros Exchange Rate Accounts Exchange Rate Accounts
Assets Statement (US$/euro) (US dollars) (US$/euro) (US dollars)
Cash 1,600,000 1.2000 1,920,000$ 0.9000 1,440,000$
Accounts receivable 3,200,000 1.2000 3,840,000 0.9000 2,880,000
Inventory 2,400,000 1.2180 2,923,200 1.2180 2,923,200
Net plant & equipment 4,800,000 1.2760 6,124,800 1.2760 6,124,800
Total 12,000,000 14,808,000$ 13,368,000$
Liabilities & Net Worth
Accounts payable 800,000 1.2000 960,000$ 0.9000 720,000$
Short-term bank debt 1,600,000 1.2000 1,920,000 0.9000 1,440,000
Long-term debt 1,600,000 1.2000 1,920,000 0.9000 1,440,000
Common stock 1,800,000 1.2760 2,296,800 1.2760 2,296,800
Retained earnings 6,200,000 1.2437 7,711,200 1.2437 7,711,200
CTA account (loss) - (0)$ (240,000)$
Total 12,000,000 14,808,000$ 13,368,000$
(240,000)$
0
a. The translation gain (loss) is: ---------------------------------------------------------------------------------------------------------------> (240,000)$
b. Under the Temporal Method, the translation loss of $240,000 would be closed into retained earnings through the income statement,
rather than as a separate line item. It is shown as a separate line item above for pedagogical purposes only. Actual year-end retained
earnings would be $7,711,200 - $240,000 = $7,471,200.
c. The translation gain (loss) differs from the Current Rate Method because "exposed assets" under the Current Rate Method are larger than
under the temporal method by the amount of inventory and net plant & equipment.
Problem 11.2 Ganado Europe (B)
Using facts in the chapter for Ganado Europe, assume as in question Ganado Europe (A) that the exchange rate on January 2, 2006, in Exhibit 11.4 dropped
in value from $1.2000/€ to $0.9000/€ (rather than to $1.0000/€). Recalculate Ganado Europe’s translated balance sheet for January 2, 2006 with the new
exchange rate using the temporal rate method.
Translation Using the Temporal Method: euro depreciates from $1.2000/euro to $0.9000/euro.
Just before devaluation
Just after devaluation
a. What is the amount of translation gain or loss?
b. Where should it appear in the financial statements?
c. Why does the translation loss or gain under the temporal method differ from the loss or gain under the current rate method?
a. What is the amount of translation gain or loss?
b. Where should it appear in the financial statements?
Translated Translated
Euros Exchange Rate Accounts Exchange Rate Accounts
Assets Statement (US$/euro) US dollars (US$/euro) US dollars
Cash 1,600,000 1.2000 1,920,000$ 1.5000 2,400,000$
Accounts receivable 3,200,000 1.2000 3,840,000 1.5000 4,800,000
Inventory 2,400,000 1.2000 2,880,000 1.5000 3,600,000
Net plant & equipment 4,800,000 1.2000 5,760,000 1.5000 7,200,000
Total 12,000,000 14,400,000$ 18,000,000$
Liabilities & Net Worth
Accounts payable 800,000 1.2000 960,000$ 1.5000 1,200,000$
Short-term bank debt 1,600,000 1.2000 1,920,000 1.5000 2,400,000
Long-term debt 1,600,000 1.2000 1,920,000 1.5000 2,400,000
Common stock 1,800,000 1.2760 2,296,800 1.2760 2,296,800
Retained earnings 6,200,000 1.2000 7,440,000 1.2000 7,440,000
CTA account (loss) - (136,800)$ 2,263,200$
Total 12,000,000 14,400,000$ 18,000,000$
2,263,200$
136,800
a. The translation gain (loss) is: ---------------------------------------------------------------------------------------------------------------> 2,400,000$
b. The translation gain for the year is added to the balance in the Cumulative Translation adjustment account, which is carried as a separate balance sheet
account within the equity section of the consolidated balance sheet. The gain does not pass through the income statement under the current rate method in
which the currency of the foreign subsidiary is a local currency functional.
Using facts in the chapter for Ganado Europe, assume the exchange rate on January 2, 2006, in Exhibit 11.4 appreciated from $1.2000/€ to $1.500/€.
Calculate Ganado Europe's translated balance sheet for January 2, 2006 with the new exchange rate using the current rate method.
Problem 11.3 Ganado Europe ( C )
Translation Using the Current Rate Method: euro appreciates from $1.2000/euro to $1.5000/euro.
Just before revaluation
Just after revaluation
a. What is the amount of translation gain or lose?
b. Where should it appear in the financial statements?
Translated Translated
Euros Exchange Rate Accounts Exchange Rate Accounts
Assets Statement (US$/euro) (US dollars) (US$/euro) (US dollars)
Cash 1,600,000 1.2000 1,920,000$ 1.5000 2,400,000$
Accounts receivable 3,200,000 1.2000 3,840,000 1.5000 4,800,000
Inventory 2,400,000 1.2180 2,923,200 1.2180 2,923,200
Net plant & equipment 4,800,000 1.2760 6,124,800 1.2760 6,124,800
Total 12,000,000 14,808,000$ 16,248,000$
Liabilities & Net Worth
Accounts payable 800,000 1.2000 960,000$ 1.5000 1,200,000$
Short-term bank debt 1,600,000 1.2000 1,920,000 1.5000 2,400,000
Long-term debt 1,600,000 1.2000 1,920,000 1.5000 2,400,000
Common stock 1,800,000 1.2760 2,296,800 1.2760 2,296,800
Retained earnings 6,200,000 1.2437 7,711,200 1.2437 7,711,200
CTA account (loss) - (0)$ 240,000$
Total 12,000,000 14,808,000$ 16,248,000$
a. The translation gain (loss) is: 240,000$
0
240,000$
b. Under the Temporal Method, the translation gain of $240,000 would be closed into retained earnings through the income statement,
rather than as a separate line item. It is shown as a separate line item above for pedagogical purposes only. Actual year-end retained
earnings would be $7,711,200 + $240,000 = $7,951,200.
Problem 11.4 Ganado Europe (D)
Using facts in the chapter for Ganado Europe, assume as in Ganado Europe (C) that the exchange rate on January 2, 2006, in Exhibit 11.4 appreciated from
$1.2000/€ to $1.5000/€. Calculate Ganado Europe’s translated balance sheet for January 2, 2006 with the new exchange rate using the temporal method.
Translation Using the Temporal Method: euro appreciates from $1.2000/euro to $1.5000/euro.
Just before revaluation
Just after revaluation
Balance Sheet (thousands of pesos Uruguayo, $U)
Exchange Rate
Assets January 1st ($U/US$)
Cash 60,000 20.00
Accounts receivable 120,000 20.00
Inventory 120,000 20.00
Net plant & equipment 240,000 20.00
540,000
Liabilities & Net Worth
Current liabilities 30,000 20.00
Long-term debt 90,000 20.00
Capital stock 300,000 15.00
Retained earnings 120,000 15.00
540,000
b) Translation
January 1st
$U/US$
Calculation of Accounting Exposures: $U (000s) 20.00
Exposed assets (all assets) 540,000 27,000$
Less exposed liabilities (curr liabs + lt debt) (120,000) (6,000)
a) Net exposure 420,000 21,000$
b. Calculate Tristan Narvaja, S.A.'s contribution to its parent's translation loss if the exchange rate on
December 31st is $U20/US$. Assume all peso Uruguayo accounts remain as they were at the beginning of
Problem 11.5 Tristan Narvaja, S.A. (A)
Tristan Narvaja, S.A., is the Uruguayan subsidiary of a U.S. manufacturing company. Its balance sheet for
January 1 follows. The January 1st exchange rate between the U.S. dollar and the peso Uruguayo ($U) is
$U20/$.
a. Determine Tristan Narvaja’s contribution to the translation exposure of its parent on January 1, using the
current rate method.
Balance Sheet (thousands of pesos Uruguayo, $U)
Exchange Rate
Assets January 1st ($U/US$)
Cash 60,000 22.00
Accounts receivable 120,000 22.00
Inventory 120,000 22.00
Net plant & equipment 240,000 22.00
540,000
Liabilities & Net Worth
Current liabilities 30,000 22.00
Long-term debt 90,000 22.00
Capital stock 300,000 15.00
Retained earnings 120,000 15.00
540,000
January 1st
$U/US$
Calculation of Accounting Exposures: $U (000s) 22.00
Exposed assets (all assets) 540,000 24,545$
Less exposed liabilities (curr liabs + lt debt) (120,000) (5,455)
Net exposure 420,000 19,091$
Problem 11.6 Tristan Narvaja, S.A. (B)
Calculate Tristan Narvaja’s contribution to its parent’s translation loss if the exchange rate on December
31st is $U22/$. Assume all peso accounts remain as they were at the beginning of the year.
Balance Sheet (thousands of pesos Uruguayo, $U)
Exchange Rate
Assets January 1st ($U/US$)
Cash 60,000 12.00
Accounts receivable 120,000 12.00
Inventory 120,000 12.00
Net plant & equipment 240,000 12.00
540,000
Liabilities & Net Worth
Current liabilities 30,000 12.00
Long-term debt 90,000 12.00
Capital stock 300,000 15.00
Retained earnings 120,000 15.00
540,000
January 1st
$U/US$
Calculation of Accounting Exposures: $U (000s) 12.00
Exposed assets (all assets) 540,000 45,000$
Less exposed liabilities (curr liabs + lt debt) (120,000) (10,000)
Net exposure 420,000 35,000$
Problem 11.7 Tristan Narvaja, S.A. (C)
Calculate Tristan Narvaja’s contribution to its parent’s translation gain or loss using the current rate
method if the exchange rate on December 31 is $U12/$. Assume all peso accounts remain as they were at
the beginning of the year.
Exchange rates for translating Bangkok Instruments' balance sheet into U.S. dollars are:
B40.00/$ April 1st exchange rate after 25% devaluation
B30.00/$ March 31st exchange rate, before 25% devaluation. All inventory was acquired at this rate.
B20.00/$ Historic exchange rate at which plant and equipment were acquired
Balance Sheet (thousands)
Translated Translated
Thai baht Exchange Rate Accounts Exchange Rate Accounts
Assets Statement (Baht/US$) US dollars (Baht/US$) US dollars
Cash ฿24,000 30 800$ 40 600$
Accounts receivable 36,000 30 1,200 40 900
Inventory 48,000 30 1,600 40 1,200
Net plant & equipment 60,000 30 2,000 40 1,500
Total ฿168,000 5,600$ 4,200$
Liabilities & Net Worth
Accounts payable ฿18,000 30 600$ 40 450$
Bank loans 60,000 30 2,000 40 1,500
Common stock 18,000 20 900 20 900
Retained earnings 72,000 34 2,100 34 2,100
CTA account (loss) 0 - (750)$
Total ฿168,000 5,600$ 4,200$
Note: Dollar retained earnings before devaluation are the cumulative sum of additions to retained earnings of all prior years, translated at exchange
rates in effect in each of those years.
This cumulative translation account (CTA) loss of $750,000 would be entered into the company's consolidated balance sheet under equity.
Balance Sheet (thousands)
Translated Translated
Thai baht Exchange Rate Accounts Exchange Rate Accounts
Assets Statement (Baht/US$) US dollars (Baht/US$) US dollars
Cash ฿24,000 30 800$ 40 600$
Accounts receivable 36,000 30 1,200 40 900
Inventory 48,000 30 1,600 30 1,600
Net plant & equipment 60,000 20 3,000 20 3,000
Total ฿168,000 6,600$ 6,100$
Liabilities & Net Worth
Accounts payable ฿18,000 30 600$ 40 450$
Bank loans 60,000 30 2,000 40 1,500
Common stock 18,000 20 900 20 900
Retained earnings 72,000 23 3,100 23 3,100
CTA account (loss) 0 - 150$
Total ฿168,000 6,600$ 6,100$
Note a: Dollar retained earnings before devaluation are the cumulative sum of additions to retained earnings of all prior years, translated at exchange
rates in effect in each of those years.
Note b: Retained earnings after devaluation are translated at the same effective rate (see Note a) as before devaluation.
The translation gain of $150,000 would be passed-through to the consolidated income statement.
TRANSLATION BY THE TEMPORAL METHOD
Before Devaluation
After Devaluation
Problem 11.8 Bangkok Instruments, Ltd (A)
Bangkok Instruments, Ltd., the Thai subsidary of a U.S. corporation, is a seismic instrument manufacturer. Bangkok Instruments manufactures the instruments
primarily for the oil and gas industry globally, though with recent commodity price increases of all kinds -- including copper -- its business has begun to grow
rapidly. Sales are primarily to multinational companies based in the United States and Europe. Bankok Instruments' balance sheet in thousands of Thai bahts (B)
as of March 31st is as follows.
The Thai baht dropped in value from B30/$ to B40/$ between March 31st and April 1st. Assuming no change in balance sheet accounts between these two days,
calculate the gain or loss from translation by both the current rate method and the temporal method. Explain the translation gain or loss in terms of changes in the
value of exposed accounts.
TRANSLATION BY THE CURRENT RATE METHOD
Before Devaluation
After Devaluation
The Temporal Method results in a translation gain, as opposed to the CTA loss found under the Current Rate Method, because of the different
exchange rates used against Net plant & equipment and the inventory line items. This gain would be impossible under the Current Rate
Method because ALL assets are exposed under that method, whereas the Temporal Method carries Net plant & equipment and inventory
at relevant historical exchange rates.
EXPLANATION OF DIFFERENT OUTCOME BY TRANSLATION METHODOLOGY
Balance Sheet (thousands)
Translated Translated
Thai baht Exchange Rate Accounts Exchange Rate Accounts
Assets Statement (Baht/US$) US dollars (Baht/US$) US dollars
Cash ฿24,000 30 800$ 25 960$
Accounts receivable 36,000 30 1,200 25 1,440
Inventory 48,000 30 1,600 25 1,920
Net plant & equipment 60,000 30 2,000 25 2,400
Total ฿168,000 5,600$ 6,720$
Liabilities & Net Worth
Accounts payable ฿18,000 30 600$ 25 720$
Bank loans 60,000 30 2,000 25 2,400
Common stock 18,000 20 900 20 900
Retained earnings 72,000 34 2,100 34 2,100
CTA account (loss) 0 - 600$
Total ฿168,000 5,600$ 6,720$
Note: Dollar retained earnings before devaluation are the cumulative sum of additions to retained earnings of all prior years, translated at exchange
rates in effect in each of those years.
This cumulative translation account (CTA) gain of $600,000 would be entered into the company's consolidated balance sheet under equity.
Balance Sheet (thousands)
Translated Translated
Thai baht Exchange Rate Accounts Exchange Rate Accounts
Assets Statement (Baht/US$) US dollars (Baht/US$) US dollars
Cash ฿24,000 30 800$ 25 960$
Accounts receivable 36,000 30 1,200 25 1,440
Inventory 48,000 30 1,600 30 1,600
Net plant & equipment 60,000 20 3,000 20 3,000
Total ฿168,000 6,600$ 7,000$
Liabilities & Net Worth
Accounts payable ฿18,000 30 600$ 25 720$
Bank loans 60,000 30 2,000 25 2,400
Common stock 18,000 20 900 20 900
Retained earnings 72,000 23 3,100 23 3,100
CTA account (loss) 0 - (120)$
Total ฿168,000 6,600$ 7,000$
Note a: Dollar retained earnings before devaluation are the cumulative sum of additions to retained earnings of all prior years, translated at exchange
rates in effect in each of those years.
Note b: Retained earnings after devaluation are translated at the same effective rate (see Note a) as before devaluation.
The translation loss of $120,000 would be passed-through to the consolidated income statement.
The Temporal Method results in a translation gain, as opposed to the CTA loss found under the Current Rate Method, because of the different
exchange rates used against Net plant & equipment and the inventory line items. This gain would be impossible under the Current Rate
Method because ALL assets are exposed under that method, whereas the Temporal Method carries Net plant & equipment and inventory
at relevant historical exchange rates.
Before Devaluation
After Devaluation
EXPLANATION OF DIFFERENT OUTCOME BY TRANSLATION METHODOLOGY
Problem 11.9 Bangkok Instruments, Ltd (B)
Using the original data provided for Bangkok Instruments, assume that the Thai baht appreciated in value from B30/$ to B25/$ between March 31 and April 1.
Assuming no change in balance sheet accounts between those two days, calculate the gain or loss from translation by both the current rate method and the
temporal method. Explain the translation gain or loss in terms of changes in the value of exposed accounts.
TRANSLATION BY THE CURRENT RATE METHOD
Before Devaluation
After Devaluation
TRANSLATION BY THE TEMPORAL METHOD
Balance Sheet of Cairo Ingot, Ltd. Translated Translated
Egyptian pounds Exchange Rate Accounts Exchange Rate Accounts
Assets Statement (Egyptian £/UK£)British pounds (Egyptian £/UK£)British pounds
Cash 16,500,000 5.50 £3,000,000.00 6.00 £2,750,000.00
Accounts receivable 33,000,000 5.50 6,000,000 6.00 5,500,000
Inventory 49,500,000 5.50 9,000,000 6.00 8,250,000
Net plant & equipment 66,000,000 5.50 12,000,000 6.00 11,000,000
Total 165,000,000 £30,000,000.00 £27,500,000.00
Liabilities & Net Worth
Accounts payable 24,750,000 5.50 £4,500,000.00 6.00 £4,125,000.00
Long-term debt 49,500,000 5.50 9,000,000 6.00 8,250,000
Invested capital 90,750,000 5.50 16,500,000 5.50 16,500,000
CTA account (loss) - - -£1,375,000.00
Total 165,000,000 £30,000,000.00 £27,500,000.00
December 31st End of Quarter
a. Calculation of Actg Exposures: Egyptian pounds 5.50 6.00
Exposed assets (all assets) 165,000,000 £30,000,000.00 £27,500,000.00
Less exposed liabilities (c.liabs + lt debt)
(74,250,000) (13,500,000) (12,375,000)
Net exposure 90,750,000 £16,500,000.00 £15,125,000.00
b. Change in translation exposure: Gain (Loss) -£1,375,000.00
Problem 11.10 Cairo Ingot, Ltd.
Before Exchange Rate Change
After Exchange Rate Change
Cairo Ingot, Ltd., is the Egyptian subsidiary of Trans-Mediterranean Aluminum, a British multinational that fashions automobile engine blocks from aluminum. Trans-
Mediterranean’s home reporting currency is the British pound. Cairo Ingot’s December 31st balance sheet is shown below. At the date of this balance sheet the exchange
rate between Egyptian pounds and British pounds sterling was £E5.50/UK£.
a. What is Cairo Ingot’s contribution to the translation exposure of Trans-Mediterranean on December 31st, using the current rate method?
b. Calculate the translation exposure loss to Trans-Mediterranean if the exchange rate at the end of the following quarter is £E6.00/£. Assume all balance sheet accounts
are the same at the end of the quarter as they were at the beginning.
Alternatively, the translation loss arising from the fall in the value of the Egyptian pound can be found as follows:
Net exposed assets (£)£16,500,000.00
Percentage change in the value of the British pound -8.3%
Translation gain (loss) -£1,375,000.00
