Problem 11.1 11.1 Ganado Europe (A) -sing facts in the chapter for anado /urope* assume the e0change rate on 1anuary )* ),,2* in /0hibit 33.+ dropped dropped in value from (3.),,,45 to (,.6,,,45 rather than to (3.,,,,45. $ecalculate anado /urope7s translated balance sheet for 1anuary )* ),,2 8ith the ne8 e0change rate using the current rate method. a. What is the amount amount of translation gain gain or loss? b. Where should it appear in the the financial statements? statements? Translation Translation Using the Current Rate Method: euro depreciates from $1.2000/euro to $0.9000/euro.
Assets Cash Accounts receivable Inventory Net plant & equipment equipment Total
Euros !tatement 1%&''%''' +%''%''' %*''%''' *%,''%''' 1%'''%'''
/iabilities 0 et 2orth Accounts payable hort!term ban" debt #ong!term debt Common stoc" $etained earnings CTA account %loss Total
,''%''' 1%&''%''' 1%&''%''' 1%,''%''' &%''%''' 3 1%'''%'''
Just before devaluation Translated Exchange ate Accounts ("!#$euro) "! dollars 1.''' # 1%'%''' 1.''' +%,*'%''' 1.''' %,,'%''' 1.''' -%&'%''' # 1*%*''%'''
1.''' 1.''' 1.''' 1.&' 1.'''
#
# #
&'%''' 1%'%''' 1%'%''' %&%,'' %**'%''' (1+&%,'') 1*%*''%'''
Just after devaluation Exchange ate ("!#$euro) '.''' '.''' '.''' '.'''
#
#
'.''' '.''' '.''' 1.&' 1.'''
a. The translati translation on gain %loss is !!!!!!!! !!!!!!!!!!!! !!!!!!!! !!!!!!!! !!!!!!!! !!!!!!!! !!!!!!!! !!!!!!!! !!!!!!!! !!!!!!!! !!!!!!!! !!!!!!!! !!!!!!!! !!!!!!!! !!!!!!!! !!!!!!!! !!!!!!!! !!!!!!!! !!!!!!!! !!!!!!!! !!!!!!!! !!!!!!!! !!!!!!!! !!!!!!!! !!!!!!!! !!!!!!!! !!!!!!!! !!!!' '
#
Translated Accounts "! dollars 1%**'%''' %,,'%''' %1&'%''' *%+'%''' 1'%,''%'''
# #
'%''' 1%**'%''' 1%**'%''' %&%,'' %**'%''' (%-+&%,'') 1'%,''%'''
# (
(%-+&%,'') 1+&%,'' %)*+,,*,,, %)*+,,*,,,
b. The translation gain %loss for the year is added added to the balance in the Cumulative Translation Translation ad9ustment account* account* 8hich is carried as a separate separate balance sheet account 8ithin the equity section of the consolidated balance sheet. The loss does not pass through the income statement under the Current $ate :ethod* in 8hich the currency of the foreign subsidiary is local currency functional.
Problem 11. Ganado Europe (4) -sing facts in the chapter for anado /urope* assume as in question anado /urope %A that the e0change rate on 1 anuary )* ),,2* in /0hibit 33.+ dropped in value from (3.),,,45 to (,.6,,,45 rather than to (3.,,,,45. $ecalculate anado /urope7s translated balance sheet for 1anuary )* ),,2 8ith the ne8 e0change rate using the temporal rate method. Translation Using the Temporal Method: euro depreciates from $1.2000/euro to $0.9000/euro.
Assets Cash Accounts receivable Inventory Net plant & equipment Total
Euros !tatement 1%&''%''' +%''%''' %*''%''' *%,''%''' 1%'''%'''
/iabilities 0 et 2orth Accounts payable hort!term ban" debt #ong!term debt Common stoc" $etained earnings CTA account %loss Total
,''%''' 1%&''%''' 1%&''%''' 1%,''%''' &%''%''' 3 1%'''%'''
Just before devaluation Translated Exchange ate Accounts ("!#$euro) ("! dollars) 1.''' # 1%'%''' 1.''' +%,*'%''' 1.1,' %+%'' 1.&' &%1*%,'' # 1*%,',%'''
1.''' 1.''' 1.''' 1.&' 1.*+
#
# #
&'%''' 1%'%''' 1%'%''' %&%,'' %11%'' (') 1*%,',%'''
Just after devaluation Exchange ate ("!#$euro) '.''' '.''' 1.1,' 1.&'
#
#
'.''' '.''' '.''' 1.&' 1.*+
#
# #
#
a. The translation gain %loss is; !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!'
#
b. -nder the Temporal :ethod* the translation loss of ()+,*,,, 8ould be closed into retained earnings through the income statement* rather than as a separate line item. It is sho8n as a separate line item above for pedagogical purposes only. Actual year!end retained earnings 8ould be (<*<33*),, ! ()+,*,,, = (<*+<3*),,. c. The translation gain %loss differs from the Current $ate :ethod because >e0posed assets> under the Current $ate :ethod are larger than under the temporal method by the amount of inventory and net plant & equipment.
Translated Accounts ("! dollars) 1%**'%''' %,,'%''' %+%'' &%1*%,'' 1+%+&,%'''
'%''' 1%**'%''' 1%**'%''' %&%,'' %11%'' (*'%''') 1+%+&,%'''
(*'%''') ' (*'%''')
Problem 11.+ Ganado Europe ( 5 ) "sing facts in the chapter for Ganado Europe% assume the exchange rate on Januar6 % ''&% in Exhibit 11.* appreciated from #1.'''$7 to #1.-''$7. 5alculate Ganado Europe8s translated balance sheet for Janu ar6 % ''& 9ith the ne9 exchange rate using the current rate method.
Translation Using the Current Rate Method: euro appreciates from $1.2000 /euro to $1.000/euro.
Assets Cash Accounts receivable Inventory Net plant & equipment Total
Euros !tatement 1%&''%''' +%''%''' %*''%''' *%,''%''' 1%'''%'''
/iabilities 0 et 2orth Accounts payable hort!term ban" debt #ong!term debt Common stoc" $etained earnings CTA account %loss Total
,''%''' 1%&''%''' 1%&''%''' 1%,''%''' &%''%''' 3 1%'''%'''
Just before revaluation Translated Exchange ate Accounts ("!#$euro) "! dollars 1.''' # 1%'%''' 1.''' +%,*'%''' 1.''' %,,'%''' 1.''' -%&'%''' # 1*%*''%'''
1.''' 1.''' 1.''' 1.&' 1.'''
#
# #
&'%''' 1%'%''' 1%'%''' %&%,'' %**'%''' (1+&%,'') 1*%*''%'''
Just after revaluation Exchange ate ("!#$euro) 1.-''' 1.-''' 1.-''' 1.-'''
#
#
1.-''' 1.-''' 1.-''' 1.&' 1.'''
#
# #
#
a. The translation gain %loss is; !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!'
#
Translated Accounts "! dollars %*''%''' *%,''%''' +%&''%''' %''%''' 1,%'''%'''
1%''%''' %*''%''' %*''%''' %&%,'' %**'%''' %&+%'' 1,%'''%'''
%&+%'' 1+&%,'' %*''%'''
b. The translation gain for the year is added to the balance in the Cumulative Translation ad9ustment account* 8hich is carried as a separate balance sheet account 8ithin the equity section of the consolidated balance sheet. The gain does not pass through the income statement under the current rate method in 8hich the currency of the foreign subsidiary is a local currency functional.
Problem 11.* Ganado Europe (:) -sing facts in the chapter for anado /urope* assume as in anado /urope %C that the e0change rate on 1anuary )* ),,2* in /0hibit 33.+ appreciated from (3.),,,45 to (3.@,,,45. Calculate anado /urope7s translated balance sheet for 1anuary )* ),,2 8ith the ne8 e0change rate using the temporal method.
Translation Using the Temporal Method: euro appreciates from $1.200 0/euro to $1.0 00/euro.
Assets Cash Accounts receivable Inventory Net plant & equipment Total
Euros !tatement 1%&''%''' +%''%''' %*''%''' *%,''%''' 1%'''%'''
/iabilities 0 et 2orth Accounts payable hort!term ban" debt #ong!term debt Common stoc" $etained earnings CTA account %loss Total
,''%''' 1%&''%''' 1%&''%''' 1%,''%''' &%''%''' 3 1%'''%'''
Just before revaluation Translated Exchange ate Accounts ("!#$euro) ("! dollars) 1.''' # 1%'%''' 1.''' +%,*'%''' 1.1,' %+%'' 1.&' &%1*%,'' # 1*%,',%'''
1.''' 1.''' 1.''' 1.&' 1.*+
#
# #
&'%''' 1%'%''' 1%'%''' %&%,'' %11%'' (') 1*%,',%'''
Just after revaluation Exchange ate ("!#$euro) 1.-''' 1.-''' 1.1,' 1.&'
#
#
1.-''' 1.-''' 1.-''' 1.&' 1.*+
a. The translation gain (loss) is;
#
# #
# #
b. -nder the Temporal :ethod* the translation gain of ()+,*,,, 8ould be closed into retained earnings through the income statement* rather than as a separate line item. It is sho8n as a separate line item above for pedagogical purposes only. Actual year!end retained earnings 8ould be (<*<33*),, ()+,*,,, = (<*6@3*),,. c. The translation gain %loss differs from the Current $ate :ethod because >e0posed assets> under the Current $ate :ethod are larger than under the temporal method by the amount of inventory and net plant & equipment.
Translated Accounts ("! dollars) %*''%''' *%,''%''' %+%'' &%1*%,'' 1&%*,%'''
1%''%''' %*''%''' %*''%''' %&%,'' %11%'' *'%''' 1&%*,%'''
*'%''' ' *'%'''
Problem 11.-
Cash Accounts receivable Inventory Net plant & equipment
/iabilities 0 et 2orth Current liabilities #ong!term debt Capital stoc" $etained earnings
:ecember +1st
-%''' 1,'%''' 1-%''' -'%''' &-'%'''
&'%''' 11'%''' +-'%''' 1+'%''' &-'%'''
Exchange ate 7$= 1.3749
1.+ 1.+ 1.+
1.+ 1.+ 1.+ 1.+
b) Translation :ec3+1 7$=
Problem 11.&
June +'th -%''' 1,'%''' 1-%''' -'%''' &-'%'''
/iabilities 0 et 2orth Current liabilities #ong!term debt Capital stoc" $etained earnings
5alculation of Accounting Exposures; /0posed assets %all assets #ess e0posed liabilities %curr liabs lt debt Net
Exchange ate (7$=) 1.*' 1.*' 1.*' 1.*'
&'%''' 11'%''' +-'%''' 1+'%''' &-'%'''
7 ('''s) &-'%''' (1'%''') *,'%'''
1.*' 1.*' 1.*' 1.*'
# #
June +'th 7$= 1.*' *&*%,& (11%*) +*%,-
Problem 11.
:ecember +'th -%''' 1,'%''' 1-%''' -'%''' &-'%'''
/iabilities 0 et 2orth Current liabilities #ong!term debt Capital stoc" $etained earnings
5alculation of Accounting Exposures; /0posed assets %all assets #ess e0posed liabilities %curr liabs lt debt Net
&'%''' 11'%''' +-'%''' 1+'%''' &-'%'''
7 ('''s) &-'%''' (1'%''') *,'%'''
Exchange ate (7$=) 1.' 1.' 1.' 1.'
1.' 1.' 1.' 1.'
:ecember +'th (7$=) 1.' # -*1%&& (1*1%&&) # *''%'''
Problem 11., 4ang>o>
Assets Cash Accounts receivable Inventory Net plant & equipment Total /iabilities 0 et 2orth Accounts payable an" loans Common stoc" $etained earnings CTA account %loss Total
4efore :evaluation Thai baht !tatement ฿*%''' +&%''' *,%''' &'%''' ฿1&,%'''
฿1,%''' &'%''' 1,%''' %''' ' ฿1&,%'''
Exchange ate (4aht$"!#) +' +' +' +'
#
#
+' +' ' +*
#
#
After :evaluation Translated Accounts "! dollars ,'' 1%'' 1%&'' %''' -%&''
&'' %''' '' %1'' 3 -%&''
Exchange ate (4aht$"!#) *' *' *' *'
#
#
*' *' ' +*
#
# #
Translated Accounts "! dollars &'' '' 1%'' 1%-'' *%''
*-' 1%-'' '' %1'' (-') *%''
Note; Bollar retained earnings before devaluation are the cumulative sum of additions to retained earnings of all prior years* translated at e0change rates in effect in each of those years. This cumulative translation account %CTA loss of (<@,*,,, 8ould be entered into the companyFs consolidated balance sheet under equity. TA!/AT 4@ TE TEBP?A/ BET?: 4alance !heet (thousands)
4efore :evaluation Thai baht
Exchange ate
After :evaluation Translated Accounts
Exchange ate
Translated Accounts
Problem 11. 4ang>o>
Assets Cash Accounts receivable Inventory Net plant & equipment Total /iabilities 0 et 2orth Accounts payable an" loans Common stoc" $etained earnings CTA account %loss Total
4efore :evaluation Thai baht !tatement ฿*%''' +&%''' *,%''' &'%''' ฿1&,%'''
Exchange ate (4aht$"!#) +' +' +' +'
฿1,%''' &'%''' 1,%''' %''' ' ฿1&,%'''
+' +' ' +*
#
#
#
#
After :evaluation Translated Accounts "! dollars ,'' 1%'' 1%&'' %''' -%&''
&'' %''' '' %1'' 3 -%&''
Exchange ate (4aht$"!#) -
#
#
' +*
#
# #
Translated Accounts "! dollars &' 1%**' 1%' %*'' &%'
' %*'' '' %1'' &'' &%'
Note; Bollar retained earnings before devaluation are the cumulative sum of additions to retained earnings of all prior years* translated at e0change rates in effect in each of those years. This cumulative translation account %CTA gain of (2,,*,,, 8ould be entered into the companyFs consolidated balance sheet under equity.
TA!/AT 4@ TE TEBP?A/ BET?: 4alance !heet (thousands)
Assets
4efore :evaluation Thai baht !tatement
Exchange ate (4aht$"!#)
After :evaluation Translated Accounts "! dollars
Exchange ate (4aht$"!#)
Translated Accounts "! dollars
Problem 11.1' 5airo
4alance !heet of 5airo
Eg6ptian pounds !tatement 1&%-''%''' ++%'''%''' *%-''%''' &&%'''%''' 1&-%'''%'''
/iabilities 0 et 2orth Accounts payable #ong!term debt Invested capital CTA account %loss Total
a. 5alculation of Actg Exposures; /0posed assets %all assets #ess e0posed liabilities %c.liabs lt debt
Net e0posure
*%-'%''' *%-''%''' '%-'%''' 3 1&-%'''%'''
Eg6ptian pounds 1&-%'''%''' (*%-'%''') '%-'%'''
4efore Exchange ate 5hange Translated Exchange ate Accounts 4ritish pounds (Eg6ptian £$" £) -.-' =+%'''%'''.'' -.-' &%'''%''' -.-' %'''%''' -.-' 1%'''%''' =+'%'''%'''.''
-.-' -.-' -.-'
=*%-''%'''.'' %'''%''' 1&%-''%''' 3 =+'%'''%'''.''
:ecember +1st -.-' =+'%'''%'''.'' (1+%-''%''') =1&%-''%'''.''
After Exchange ate 5hange Translated Exchange ate Accounts 4ritish pounds (Eg6ptian £$" £) &.'' =%-'%'''.'' &.'' -%-''%''' &.'' ,%-'%''' &.'' 11%'''%''' =%-''%'''.''
&.'' &.'' -.-'
=*%1-%'''.'' ,%-'%''' 1&%-''%''' 3=1%+-%'''.'' =%-''%'''.'' End of uarter &.'' =%-''%'''.'' (1%+-%''') =1-%1-%'''.''
b. 5hange in translation exposure; Gain (/oss)
3=1%+-%'''.''
Alternatively* the translation loss arising from the f all in the value of the /gyptian pound can be found as f ollo8s; Net e0posed assets %£ Dercentage change in the value of the ritish pound Translation gain %loss
=1&%-''%'''.'' 3,.+F 3=1%+-%'''.''