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Chap13 Pbms MBF12e
Chap13 Pbms MBF12e
Chap13 Pbms MBF12e
Using facts in the chapter for Trident Europe, assume that the exchange rate on January 2, 2011, in Exhibit 13.4 dropped in value from $1.2000/€ to
$0.9000/€ rather than to $1.0000/€. Recalculate Trident Europe’s translated balance sheet for January 2, 2011 with the new exchange rate using the current
rate method.
Translation Using the Current Rate Method: euro depreciates from $1.2000/euro to $0.9000/euro.
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 lsos 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 13.2 Trident Europe (B)
Using facts in the chapter for Trident Europe, assume as in Trident Europe (A) that the exchange rate on January 2, 2011, in Exhibit 13.4 dropped in value
from $1.2000/€ to $0.9000/€ rather than to $1.0000/€. Recalculate Trident Europe’s translated balance sheet for January 2, 2011 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.
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 13.3 Trident Europe ( C )
Using facts in the chapter for Trident Europe, assume that the exchange rate on January 2, 2011, in Exhibit 13.4 appreciated from $1.2000/€ to $1.500/€.
Calculate Trident Europe’s translated balance sheet for January 2, 2011 with the new exchange rate using the current rate method.
Translation Using the Current Rate Method: euro appreciates from $1.2000/euro to $1.5000/euro.
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.
Problem 13.4 Trident Europe (D)
Using facts in the chapter for Trident Europe, assume as in Trident Europe (C) that the exchange rate on January 2, 2011, in Exhibit 13.4 appreciated from
$1.2000/€ to $1.5000/€. Calculate Trident Europe’s translated balance sheet for January 2, 2011 with the new exchange rate using the temporal rate method.
Translation Using the Temporal Method: euro appreciates from $1.2000/euro to $1.5000/euro.
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 = $7,471,200.
c. The translation gain (loss) differs from the Current Rate Method because "exposed assets" under the Current Rate Method are larger than
under the temporal method by the amount of inventory and net plant & equipment.
Problem 13.5 Productos Montevideo, S.A. (A)
Montevideo Products, S.A., is the Uruguayan subsidiary of a U.S. manufacturing company. Its balance
sheet for January 1 follows. The January 1st exchange rate between the U.S. dollar and the peso Uruguayo
($U) is $U20/$.
Determine Montevideo’s contribution to the translation exposure of its parent on January 1, using the
current rate method.
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)
Net exposure 420,000 $ 21,000
Problem 13.6 Productos Montevideo, S.A. (B)
Calculate Montevideo’s contribution to its parent’s translation loss if the exchange rate on December 31 is
$U22/$. Assume all peso accounts remain as they were at the beginning of the year.
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)
Net exposure 420,000 $ 21,000
Problem 13.7 Productos Montevideo, S.A. (C)
Calculate Montevideo’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.
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)
Net exposure 420,000 $ 21,000
Problem 13.8 Bangkok Instruments, Ltd (A)
Bangkok Instruments, Ltd., is the Thai affiliate of a U.S. 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 31 is
as follows.
Using the data presented, assume that the Thai baht dropped in value from B30/$ to B40/$ between March 31 and April 1. 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.
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.
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 $150,000 would be passed-through to the consolidated income statement.
The Temporal Method results in a translation gain, as opposed to the CTA loss found under the Current Rate Method, because of the different
exchange rates used against Net plant & equipment and the inventory line items. This gain would be impossible under the Current Rate
Method because ALL assets are exposed under that method, whereas the Temporal Method carries Net plant & equipment and inventory
at relevant historical exchange rates.
Problem 13.9 Bangkok Instruments, Ltd (B)
Using the original data provided for Bangkok Instruments, assume that the Thai baht appreciated in value from B30/$ 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.
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.
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.
Problem 13.10 Cairo Ingot, Ltd.
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 31 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 31, 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/UK£. 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