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Module -6- Problems

Problems on Translation Exposure


1. Farm Products is the Canadian affiliate of a US manufacturing company. Its balance sheet, in
thousands of Canadian dollars, for January 1, 20x1 is shown below. The January 1, 20x1,
exchange rate was C$1.6/$.
Farm Products Balance Sheet (Thousands of C$)
Assets
Cash

C$1,00,000

Liabilities and Net Worth


Current Liabilities

C$ 60,000

Accounts receivable

2,20,000

Long-term debt

1,60,000

Inventory

3,20,000

Capital. Stock

6,20,000,

Net plant and equipment

2,00,000

Total
C$8,40,000
C$8,40,000
a. Determine Farm Products accounting exposure on January I, 20x2, using the current rate
method/ monetary/non-monetary method.
b. Calculate Farm Products contribution to its parents accounting loss if the exchange rate on
December 31, 20x1 was C$ 1.8 per $. Assume all accounts remain as they were at the beginning
of the year.
2. AV Ltd, is the Indian affiliate of a US sports manufacturer. AV Ltd manufactures items which
are sold primarily in the United States and Europe. AVs balance sheet in thousands of rupees as
of March 31 is as follows:
Assets
Cash
Accounts receivable
Inventory
Net plant and equipment

Liabilities and Net Worth


Accounts payable
Rs. 3,500
Short-term bank loan
1,500
Long-term loan
4,000
Capital stock
10,000
Retained earnings
6,000
Total
Rs 25,000
Rs 25,000
Exchange rates for translating the balance sheet into US dollars are
Rs 6,000
4,500
4,500
10,000

Rs 35/$: Historic exchange rate, at which plant and equipment, long-term loan and common
stock were acquired or issued.
Rs 40/$: March 31 exchange rate. This was also the rate at which inventory was acquired.
Rs 42/$: April 1 exchange rate, after devaluation of 20%.
Assuming no change in balance sheet accounts between March 31and April 1st , calculate
accounting gain or loss by the current rate method and by monetary/ non-monetary method.
Explain accounting loss in terms of changes in the value of exposed accounts.

3.ABC House Led manufactures orange marmalade in England. It is the wholly owned
subsidiary of XYZ Inc. of USA. The functional currency for ABC is the pound sterling which
currently sells at $ 1, 5000/. The reporting currency for XYZ is the U S dollar. Nonconsolidated financial statements for both ABC and XYZ are as follows (in thousands):
Assets
Cash
Accounts receivable
Inventory
Net plant and equipment
Investment
Total
Liabilities and Net Worth

XYZ Inc.
$8,000
10,000
8,000
10,000
4,500
$40,500

Current liabilities
$ 22,000
5-year terra loan
Capital stock
9.000
Retained earnings
9,500
Total
$ 40,500
a. Prepare a consolidated balance sheet for XYZ Ltd.

ABC Ltd
2,000
4,000
2,000
6,000
14,000
4.000
4,000
2,000
4.000
14,000

b. What is ABC Ltds accounting exposure in dollars? Use the current rate method of
calculation.
4. The Northwood Company of Seattle has a subsidiary in Indonesia where the currency is the
rupiah (Rp). The current balance sheet of the Indonesian subsidiary, in thousands of rupiahs, is
Assets
Cash

Rp 4,000

Liabilities and Net Worth


Accrued wages

Rp 4,800

Bank note payable


Long-term debt (in$)
Shareholders equity

12,800
12,000
20,000

Cash
$3,200
Accounts receivable
8,000
Accounts receivable
8,800
(in $)
Inventory
9,600
Net plant and
16,000
equipment
Total
Rp49,600
Current exchange rates are Spot rate

Rp 2,500/$

One-year forward rate

Rp 2,800/$

Northwoods forecast of the spot

Rp49,600

rate one year hence

Rp 3,400/$

What percentage amount of devaluation of the rupiah does Northwood forecast?

What is the accounting exposure of Northwoods subsidiary, using the methods of


FAS#52?

If Northwood decides to hedge its accounting exposure in the forward exchange market
and if Northwoods corporate tax rate is 40% what should Northwood do?

5. Translate the following balance sheets of the two subsidiaries of ABC, Inc. (a US MNC
into US dollars using: (a) monetary/non-monetary method, and (b) the current method of
translation.
UK Subsidiary (Millions French Subsidiary(Millions
of pounds sterling)

of French franc)

31/12/12

31/12/13

31/12/12

31/12/13

Cash & marketable securities

120

143

2,143

1,915

Accounts receivable

315

407

4,020

3,775

Inventories

612

750

3,950

3,850

Fixed assets (net)

1,350

1,300

7,010

6,850

Total assets

2,397

2,600

17,123

16,390

Bank loans

500

450

3,000

2,800

Accounts payable

490

553

4,873

4,658

Long-term debt

650

700

4,250

4,000

Net worth

757

897

5,000

4,932

Total liabilities and net worth

2,397

2,600

17,123

16,390

Assume the following exchange rates

31/12/13 1.00 = US $1.40, US $1.00 = FFr 7.25

31/12/12 1.00 = US $1.05, US $1.00 = FFr 9.00

Show also how the parent company will reflect the exchange gains (losses) in its
consolidated statements using the monetary/non-monetary method.

6. Stoner U.K., the British subsidiary of Stoner U.S. has current assets of 2 million, fixed assets
of 3 million, and current liabilities of 2- million. Stoner has no long-tern Liabilities.

Calculate Stoner U.K.'s translation exposure under all the four translation methods?

If the pound is assumed to be the functional currency, and it depreciates from $1.60 to
$1.50 calculate the FASB-52 translation gain (loss) that will be reflected in the CTA
account?

Included in current assets is inventory of 0.7 million. Assume the historical exchange
rates for inventory and fixed assets are $1.45 and $1.65 and dollar is the functional
currency. Calculate Stoner U.K's translation gain or loss.

7. ABC Inc., the French subsidiary of a U.S. company, has the following balance sheet:
Assets (Euro Thousand) Euro
Cash marketable securities

Euro 17000

Account receivable
Inventory
Net fixed assets

20000
35000
83000
Euro 155,000

Liabilities (Euro Thousands) 35.000


Accounts payable
Short-term debt
Long-term debt
Equity

Euro 12000
19000
68000
56000
Euro 155.000

8. New Haven a dealer based in Europe, is owned by an MNC Inc. of the United States. Given
below is New Havens balance sheet at the current exchange rate of $1.50/ Euro.
Value in Euros
Value at $1.50/
Assets
Cash & short term securities
$50,000
$75,000
Accounts receivable
$30,000
$45,000
Inventory
$20,000
$30,000
Plant & equipment
$600,000
$900,000
Total assets
$7,00,000
$1,050,000
Liabilities
Accounts payable
$150,000
$225,000
Short-term debt
$60,000
$90,000
Long-term debt
$410,000
$615,000
Net worth
$80,000
$120,000
Total liabilities & net worth
$7,00,000
$1,050,000
For the current/non current rate method, the temporal method, and the all current rate method
calculate.

The Companys exposed assets, exposed liabilities, and net exposed assets under each
accounting translation method.

Suppose the Euro depreciates by 25%. Identify the impact of a 25 percent depreciation of
the Euro on New Havens consolidated balance sheet under each accounting translation
method.

9. Rebecca, a manufacturer based in Sydney, Australia, is owned by Cemex, Inc. of the United
States. Rebeccas balance sheet at the current exchange rate of AU$1.60/$ is shown as follows.

Value in AU

Value at $1.60/$

Assets
Cash & other securities
AU $3,20,000
$2, 00,000
Accounts receivable
AU$1,60,000
$1,00,000
Inventory
AU $6 40,000
$ 4 00,000
Fixed Assets
AU $4 80,000
S3 00,000
Total assets
AU $1,600,000
$1,000,000
Liabilities
Accounts payable
AU $320,000
$200,000
Long term debt
AU $160,000
$100,000
Net worth
AU$1,120,000
$700,000
Total liabilities & net worth
AU $1,600,000
$1,000,000
Identify Rebeccas exposed assets, exposed liabilities, and net exposed assets under all
translation method.

Identify the impact of a depreciation of the U.S dollar from C$1.60/$ to C$1.40/S on
Rebeccas Consolidated balance sheets under all translation method and comment on
your results.

10. Lees U.S.s Japanese subsidiary, Lee Japan, has exposed assets of 8.5 billion and exposed
liabilities of 7.5 billion. During the year, the yen appreciates from 135/$ to 105/$.
a) Calculate Lee Japan's net translation exposure at the beginning of the year in yen and
in dollars?
b) Calculate Lee Japans translation gain or loss from the change in the yens value?
c) Suppose for the next year, exposed assets of Lee Japan increase by 2.5 billion while
exposed liabilities increase by 2 billion. During the year, the yen depreciates from
105/ to 130/5. What is Lee Japans translation gain or loss for this year? Also
calculate what is its total translation gain or loss for the two years?
11. Choi International, the Chinese affiliate of an American MNC had the following balance
sheet on January 1, 2012.
The exchange rate on January 1, 2012, was Chinese Remnibi 6.9450 = $1

What is Choi International FASB-52 Remnibi translation exposure on January


2012?
Assets (Remnibi in Thousand)
Cash and Bank

Rem 31,000

Account receivable

50,000

Inventory

42,000

Net fixed assets

121,000
Rem 244,000

Liabilities (Remnibi in Thousands)


Current liabilities

Rem 56,000

1,

Long-term debt

24,000

Equity

164,000
Rem244,000

Suppose the exchange rate on December 31, 2012, is Remnibi 8.9450 = 1 US$. What will
be Choi International s translation loss for the year?

Suppose Choi International were to borrow an additional Remnibi 18,000 and use the
funds to pay dividends to its parent. Comment on the translation exposure of Choi
International?

12. Kennedy Inc is a US based MNC that conducts a part of its business in Malaysia. Its US
sales are denominated in US dollars while its Malaysian sales ate denominated in Malaysian
dollars. Its pro-forma income statement for the next year is shown below. Show how the
costs, revenue and earnings items would be affected by 3 possible exchange rate scenarios
for the Malaysian dollar. 1) $ 3.50, 2) $ 3.60 and 3) $ 3.70.
Assume US sales will be unaffected by the exchange rate. Also assume that Malaysian dollar
earnings will be remitted to the US at the end of the period.
Revenue and cost estimates: (Kennedy Inc. in millions of US dollars and Malaysian dollar)
US Business

Malaysian Business

Sales

$3,500

M$ 250

Cost of goods sold

1850

60

Gross Profit

1,650

190

Operating expenses

650

100

EBIT

$ 1000

MS 90

Interest Expenses

800

70

EBT

$200

Ml 20

13. The balance sheet of Kooper, a manufacturer in Brazil is given below:


Assets
Current assets
Cash & marketable securities
Accounts receivable
Fixed assets
Land
Furniture
Total Assets

Liabilities and Owners Equity


Current liabilities
$45,000
Accounts payable
$60,000
Notes payable
$245,000' Short-term debt
$960,000 Long-term debt
Shareholders equity
$1,110,000 Liabilities & owners equity

$100,000
$20,000
$60,000
$500,000
$430,0000
$1,110,000

Koopers accounts payable balance is a Brazilian Real 400,000 purchase of new style furnishings
for use in the office. The purchase was placed on the books at an exchange rate of $0.60/real.
The balance is due in six months and is payable in Brazilian Real. To hedge this Real exposure,
Kooper buys Real 400,000 six months forward at a forward rate of $0.60/Real.
a. What will Kooper accounts look like if this forward transaction is capitalized on the balance
sheet?
b. Calculate Kooper debt ratio and current ratio before and after the forward contract is
capitalized on the balance sheet. Is Koopers financial risk higher or lower after the Brazilian
Real liability is hedged?
c. Comment on the balance sheet if the forward currency transaction is accounted for as hedge?

14. Suppose that on February I, American Golfs French subsidiary, Golf du France, had a
balance sheet that showed current assets of FF 1 million; current liabilities of FF 300,000; total
assets of FF 2.3 million; and total liabilities of FF 900,000. On December 31, Golf du Frances
balance sheet in francs was unchanged from the figures given above, but the franc had declined
in value from $0.2280 at the start of the year to $0.2180 at the end of the year. Under FASB-52,
what is the translation amount to be shown on American Golfs equity account for the year if the
franc is the functional currency? How would your answer change if the dollar were the
functional currency?

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