Fund6e Chp11 Pbms

Problem 11.
1 Aidan Turkey (A)
Using the facts outlined for Aidan Turkey, assume the exchange rate on January 2, 2016, in Exhibit 11.4 dropped in value from ₺5.2000/€
to ₺5.5000/€ (rather than to ₺6.0000/€). Recalculate Aidan Turkey’s translated balance sheet for January 2, 2016, 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?
December 31, 2015 January 2, 2016

In Turkish lira (₺) Exchange Rate Translated Accounts (€) Exchange Rate (₺/€) Translated Accounts (€)
Assets
Cash 10,600,000 5.2000 € 2,038,462 5.5000 € 1,927,273
Accounts receivable 30,200,000 5.2000 5,807,692 5.5000 5,490,909

Inventory 20,400,000 5.2000 3,923,077 5.5000 3,709,091
Net plant and equipment 40,800,000 5.2000 7,846,154 5.5000 7,418,181

Total 102,000,000 19,615,385 18,545,454
Liabilities & Net Worth

Accounts payable 8,000,000 5.2000 € 1,538,462 5.5000 € 1,454,545
Short-term bank debt 10,600,000 5.2000 2,038,462 5.5000 1,927,273
Long-term debt 10,600,000 5.2000 2,038,462 5.5000 1,927,273
Common stock 10,800,000 5.2760 2,047,005 5.2760 2,047,005

Retained earnings 62,000,000 5.2000(a) 11,923,076 5.2425(b) 11,923,076
CTA account (loss) - € 29,918 € 733,718
Total 102,000,000 19,615,385 18,545,454
(a)
Euro retained earnings before depreciation are the cumulative sum of additions to retained earnings of all prior years, translated at the exchange rates in
each year.
(b)
Translated into euros at the same rate as before depreciation of the Turkish lira.
(a) The translation loss is €733,718.

(b) The translation loss is reflected as a decrease in the equity account.
Problem 11.2 Aidan Turkey (B)
Using the facts outlined for Aidan Turkey, assume as in Problem 11.1 that the exchange rate on January 2, 2016, in Exhibit 11.4 dropped from
₺5.2000/€ to ₺5.5000/€ (rather than to ₺6.0000/€). Recalculate Aidan Turkey’s translated balance sheet for January 2, 2016, with the new exchange rate
using the temporal rate method.
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?

In Turkish lira Exchange Rate Translated Exchange Rate Translated Accounts (€)
(₺ ) (₺/€) Accounts (€) (₺/€)
Assets
Cash 10,600,000 5.2000 € 2,038,462 5.5000 € 1,927,273
Inventory 20,400,000 5.2000 3,923,077 5.5000 3,709,091 2-Jan-16
Net plant and equipment 40,800,000 5.2000 7,846,154 5.5000 7,418,181 Exchange Translated Accounts
Rate (€)
Total 102,000,000 19,615,385 18,545,454
(₺/€)
Liabilities & Net Worth 5.5 1927273
Accounts payable 8,000,000 5.2000 € 1,538,462 5.5000 € 1,454,545 5.5 5,490,909
Short-term bank debt 10,600,000 5.2000 2,038,462 5.5000 1,927,273 5.5 3,709,091
Long-term debt 10,600,000 5.2000 2,038,462 5.5000 1,927,273 5.5 7,418,181
Common stock 10,800,000 5.2760 2,047,005 5.2760 2,047,005 18,545,454
Translation gain (loss) - €(121,677) (c)
Total 102,000,000 19,488,829 19,060,857 5.5 1454545

5.5 1,927,273
Euro retained earnings before depreciation are the cumulative sum of additions to retained earnings of all prior years, translated at the exchange rates in
(a)
each year.
(b)
Translated into euros at the same rate as before depreciation of the Turkish lira.
(c)
Under the temporal method, the translation of €121,677 would be closed into retained earnings through the income statement rather than left as a separate
item as shown here. Ending retained earnings would actually be €11,826,438 - €121,677 = €11,704,761.
(a) The translation loss is €121,677

(b) Under the temporal method, the translation of €121,677 would be closed into retained earnings through the income statement rather than left as a separate
item as shown here. Ending retained earnings would actually be €11,826,438 - €121,677 = €11,704,761
(c) Under the current rate method, translation gains and losses are handled only as an adjustment to net worth through an equity account named the
“cumulative translation adjustment” account. Nothing passes through the income statement. The temporal method pass foreign exchange gains or losses
through the income statement before they enter on to the balance sheet through the accumulated retained earnings account.
Problem 11.3 Aidan Turkey (C)
Using the facts outlined for Aidan Turkey, assume the exchange rate on January 2, 2016, in Exhibit 11.4 appreciated from ₺5.2000/€ to ₺4.9000/€. Calculate
Aidan Turkey’s translated balance sheet for January 2, 2016, with the new exchange rate using the current rate method.

Assets (₺) (₺/€) Accounts (€) (₺/€)
Cash 10,600,000 5.2000 € 2,038,462 4.9000 € 1,927,273

Accounts receivable
30,200,000 5.2000 5,807,692 4.9000 5,490,909
Inventory 20,400,000 5.2000 3,923,077 4.9000 3,709,091
Net plant and equipment
40,800,000 5.2000 7,846,154 4.9000 7,418,181
Total 102,000,000 19,615,385 18,545,454

Long-term debt 10,600,000 5.2000 2,038,462 4.9000 2,163,265
Common stock 10,800,000 5.2760 2,047,005 5.2760 2,047,005
-
Translation gain (loss) € 29,918 € 887,063(c)
Total 102,000,000 19,615,385 20,816,326
(a)
Euro retained earnings before appreciation are the cumulative sum of additions to retained earnings of all prior years, translated at the exchange rates in
each year.
(b)
Translated into euros at the same rate as before appreciation of the Turkish lira.
(a) The translation gain is €887,062.

(b) The translation loss is reflected as a decrease in the equity account.
Problem 11.4 Aidan Turkey (D)
Using the facts outlined for Aidan Turkey, assume that the exchange rate on January 2, 2016, in Exhibit 11.4 appreciated from ₺5.2000/€ to ₺4.9000/€.
Calculate Aidan Turkey’s translated balance sheet for January 2, 2016, with the new exchange rate using the temporal method.
a. What is the amount of translation gain or lose?

Assets (₺) (₺/€) Accounts (€) (₺/€)
Cash 10,600,000 5.2000 € 2,038,462 4.9000 € 2,163,265

Inventory 20,400,000 5.2180 3,909,544 5.2180 3,909,544
Net plant and equipment 40,800,000 5.2760 7,733,131 5.2760 7,733,131

Total 102,000,000 19,488,829 19,969,205

Long-term debt 10,600,000 5.2000 2,038,462 4.9000 2,163,265
Common stock 10,800,000 5.2760 2,047,005 5.2760 2,047,005
-
Translation gain (loss) € 29,918 € 136,579(c)
Total 102,000,000 19,488,829 19,969,205
Euro retained earnings before appreciation are the cumulative sum of additions to retained earnings of all prior years, translated at the exchange rates in
(a)
each year.
(b)
Translated into euros at the same rate as before appreciation of the Turkish lira.
(c)
Under the temporal method, the translation of €136,579 would be closed into retained earnings through the income statement rather than left as a separate item as shown here. Ending retained
earnings would actually be €11,826,438 + €136,579 = €11,963,017.
(b) Under the temporal method, the translation of €136,579 would be closed into retained earnings through the income statement
rather than left as a separate item as shown here. Ending retained earnings would actually be €11,826,438 + €136,579 =
€11,963,017
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.
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
the year.
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

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
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.

Exchange Rate
Cash 60,000 22.00
Inventory 120,000 22.00
540,000

540,000
January 1st
$U/US$
Net exposure 420,000 $ 19,091
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 Rate
Cash 60,000 12.00
Inventory 120,000 12.00
540,000

540,000
January 1st
$U/US$
Net exposure 420,000 $ 35,000
Problem 11.8 Nataja Mumbai Ltd. (A)
Nataja Mumbai Ltd., the Indian subsidiary of a Belgian corporation, is a cardiothoracic instruments manufacturer. Nataja manufactures the instruments primarily
for the medical industry globally—though with recent advances in cardiovascular surgery, its business has begun to grow rapidly. Sales are primarily to hospitals
based on Europe and Asia. Nataja Mumbai’s balance sheet in thousands of Indian Rupees (INR) as of March 31st is as follows.
Using the data presented, assume that the Indian rupee dropped in value from INR59.39/€ to INR79.19/€ between March 31st and April 1st. Assuming no change
in the balance sheet 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 change in the value of the exposed accounts.
TRANSLATION BY THE CURRENT RATE METHOD
Balance Sheet (thousands) Before Devaluation After Devaluation

Translated Translated
Indian Rupee Exchange Rate Accounts Exchange Rate Accounts
Assets Statement (INR/€) Euros (INR/€) Euros
Cash ₹ 26,000 59.39 € 438 79.19 € 328
Accounts receivable 38,000 59.39 640 79.19 480
Inventory 46,000 59.39 775 79.19 581
Net plant & equipment 65,000 59.39 1,094 79.19 821
Total ₹ 175,000 € 2,947 € 2,210

Accounts payable ₹ 11,000 59.39 € 185 79.19 € 139
Bank loans 70,000 59.39 1,179 79.19 884
Common stock 20,000 50.00 400 50.00 400
Retained earnings 74,000 62.57 1,183 62.57 1,183
CTA account (loss) 0 - -€ 396
Total ₹ 175,000 € 2,947 € 2,210
Note: Euro 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 €395,739 would be entered into the company's consolidated balance sheet under equity.
TRANSLATION BY THE TEMPORAL METHOD

Thai baht Exchange Rate Accounts Exchange Rate Accounts
Cash ₹ 24,000.00 59.39 € 404 79.19 € 303
Inventory 48,000 59.39 808 30.00 1,600
Net plant & equipment 60,000 50.00 1,200 50.00 1,200
Total ₹ 168,000.00 € 3,018 € 3,558

Accounts payable ₹ 18,000.00 59.39 € 303 79.19 € 227
Bank loans 60,000 59.39 1,010 79.19 758
Common stock 18,000 59.39 303 50.00 360
CTA account (loss) 0 - € 810.644
Total ₹ 168,000.00 € 3,018 € 3,558
Note a: Euro retained earnings before devaluation are the cumulative sum of additions to retained earnings of all prior years, translated at exchange
Note b: Retained earnings after devaluation are translated at the same effective rate (see Note a) as before devaluation.
The translation gain of €810,644 would be passed-through to the consolidated income statement.
EXPLANATION OF DIFFERENT OUTCOME BY TRANSLATION METHODOLOGY
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 11.9 Nataja Mumbai Ltd. (B)
Using the original data provided for Nataja Mumbai, assume that the Indian rupee appreciated in value from INR59.39/€ to INR54.50/€ 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 the exposed accounts.
TRANSLATION BY THE CURRENT RATE METHOD

Cash ₹ 26,000 59.39 € 438 54.50 € 477
Inventory 46,000 59.39 775 54.50 844
Total ₹ 175,000 € 2,947 € 3,211

Bank loans 70,000 59.39 1,179 54.50 1,284
Common stock 20,000 50.00 400 50.00 400
CTA account (loss) 0 - € 142.013
Total ₹ 175,000 € 2,947 € 3,211
Note: Euro retained earnings before devaluation are the cumulative sum of additions to retained earnings of all prior years, translated at exchange
This cumulative translation account (CTA) gain of €142,013 would be entered into the company's consolidated balance sheet under equity.
TRANSLATION BY THE TEMPORAL METHOD

Cash ₹ 26,000 59.39 € 438 25.00 € 1,040
Accounts receivable 38,000 59.39 640 25.00 1,520
Inventory 46,000 59.39 775 59.39 775
Total ₹ 175,000 € 3,152 € 4,635

Bank loans 70,000 59.39 1,179 25.00 2,800
Common stock 20,000 50.00 400 50.00 400
CTA account (loss) 0 - -€ 394
Total ₹ 175,000 € 3,152 € 4,635
Note a: Euro retained earnings before devaluation are the cumulative sum of additions to retained earnings of all prior years, translated at exchange
Note b: Retained earnings after devaluation are translated at the same effective rate (see Note a) as before devaluation.
The translation loss of €393,757 would be passed-through to the consolidated income statement.
EXPLANATION OF DIFFERENT OUTCOME BY TRANSLATION METHODOLOGY
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 11.10 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 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.
Before Exchange Rate Change After Exchange Rate Change

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
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

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
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

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Problem 11.

1 Aidan Turkey (A)

December 31, 2015 January 2, 2016

Cash 10,600,000 5.2000 € 2,038,462 5.5000 € 1,927,273

Accounts receivable 30,200,000 5.2000 5,807,692 5.5000 5,490,909

Net plant and equipment 40,800,000 5.2000 7,846,154 5.5000 7,418,181

Liabilities & Net Worth

Common stock 10,800,000 5.2760 2,047,005 5.2760 2,047,005

(a) The translation loss is €733,718.

December 31, 2015 January 2, 2016

Total 102,000,000 19,488,829 19,060,857 5.5 1454545

(a) The translation loss is €121,677

December 31, 2015 January 2, 2016

Cash 10,600,000 5.2000 € 2,038,462 4.9000 € 1,927,273

Liabilities & Net Worth

(a) The translation gain is €887,062.

December 31, 2015 January 2, 2016

Cash 10,600,000 5.2000 € 2,038,462 4.9000 € 2,163,265

Net plant and equipment 40,800,000 5.2760 7,733,131 5.2760 7,733,131

Liabilities & Net Worth

Balance Sheet (thousands of pesos Uruguayo, $U)

Liabilities & Net Worth

Balance Sheet (thousands of pesos Uruguayo, $U)

Liabilities & Net Worth

Balance Sheet (thousands of pesos Uruguayo, $U)

Liabilities & Net Worth

TRANSLATION BY THE CURRENT RATE METHOD

Balance Sheet (thousands) Before Devaluation After Devaluation

Liabilities & Net Worth

TRANSLATION BY THE TEMPORAL METHOD

Balance Sheet (thousands) Before Devaluation After Devaluation

Liabilities & Net Worth

EXPLANATION OF DIFFERENT OUTCOME BY TRANSLATION METHODOLOGY

TRANSLATION BY THE CURRENT RATE METHOD

Balance Sheet (thousands) Before Devaluation After Devaluation

Liabilities & Net Worth

TRANSLATION BY THE TEMPORAL METHOD

Balance Sheet (thousands) Before Devaluation After Devaluation

Liabilities & Net Worth

EXPLANATION OF DIFFERENT OUTCOME BY TRANSLATION METHODOLOGY

Before Exchange Rate Change After Exchange Rate Change

Liabilities & Net Worth

December 31st End of Quarter

b. Change in translation exposure: Gain (Loss) -£1,375,000.00

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