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 Europes 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 it appear in the financial statements?
Translation Using the Current Rate Method: euro depreciates from $1.2000/euro to $0.9000/euro.

Assets
Cash
Accounts receivable
Inventory
Net plant & equipment
Total

Euros
Statement
1,600,000
3,200,000
2,400,000
4,800,000
12,000,000

Liabilities & Net Worth

Accounts payable
Short-term bank debt
Long-term debt
Common stock
Retained earnings
CTA account (loss)
Total

800,000
1,600,000
1,600,000
1,800,000
6,200,000
12,000,000

Just before devaluation

Translated
Exchange Rate
Accounts
(US$/euro)
US dollars
1.2000
$
1,920,000
1.2000
3,840,000
1.2000
2,880,000
1.2000
5,760,000
$
14,400,000

1.2000
1.2000
1.2000
1.2760
1.2000

$
$

960,000
1,920,000
1,920,000
2,296,800
7,440,000
(136,800)
14,400,000

Just after devaluation

Exchange Rate
(US$/euro)
0.9000
0.9000
0.9000
0.9000

0.9000
0.9000
0.9000
1.2760
1.2000

$
$

$
a. The translation gain (loss) is ---------------------------------------------------------------------------------------------------------------->

Translated
Accounts
US dollars
1,440,000
2,880,000
2,160,000
4,320,000
10,800,000

720,000
1,440,000
1,440,000
2,296,800
7,440,000
(2,536,800)
10,800,000

(2,536,800)
136,800
(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 11.2 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 Europes 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.

Assets
Cash
Accounts receivable
Inventory
Net plant & equipment
Total

Euros
Statement
1,600,000
3,200,000
2,400,000
4,800,000
12,000,000

Liabilities & Net Worth

Accounts payable
Short-term bank debt
Long-term debt
Common stock
Retained earnings
CTA account (loss)
Total

800,000
1,600,000
1,600,000
1,800,000
6,200,000
12,000,000

Just before devaluation

Translated
Exchange Rate
Accounts
(US$/euro)
(US dollars)
1.2000
$
1,920,000
1.2000
3,840,000
1.2180
2,923,200
1.2760
6,124,800
$
14,808,000

1.2000
1.2000
1.2000
1.2760
1.2437

$
$

960,000
1,920,000
1,920,000
2,296,800
7,711,200
(0)
14,808,000

Just after devaluation

Exchange Rate
(US$/euro)
0.9000
0.9000
1.2180
1.2760

0.9000
0.9000
0.9000
1.2760
1.2437

$
$

$
a. The translation gain (loss) is: --------------------------------------------------------------------------------------------------------------->

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.

Translated
Accounts
(US dollars)
1,440,000
2,880,000
2,923,200
6,124,800
13,368,000

720,000
1,440,000
1,440,000
2,296,800
7,711,200
(240,000)
13,368,000

(240,000)
0
(240,000)

Problem 11.3 Ganado Europe ( C )

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.
Translation Using the Current Rate Method: euro appreciates from $1.2000/euro to $1.5000/euro.

Assets
Cash
Accounts receivable
Inventory
Net plant & equipment
Total

Euros
Statement
1,600,000
3,200,000
2,400,000
4,800,000
12,000,000

Liabilities & Net Worth

Accounts payable
Short-term bank debt
Long-term debt
Common stock
Retained earnings
CTA account (loss)
Total

800,000
1,600,000
1,600,000
1,800,000
6,200,000
12,000,000

Just before revaluation

Translated
Exchange Rate
Accounts
(US$/euro)
US dollars
1.2000
$
1,920,000
1.2000
3,840,000
1.2000
2,880,000
1.2000
5,760,000
$
14,400,000

1.2000
1.2000
1.2000
1.2760
1.2000

$
$

960,000
1,920,000
1,920,000
2,296,800
7,440,000
(136,800)
14,400,000

Just after revaluation

Exchange Rate
(US$/euro)
1.5000
1.5000
1.5000
1.5000

1.5000
1.5000
1.5000
1.2760
1.2000

$
$

$
a. The translation gain (loss) is: --------------------------------------------------------------------------------------------------------------->

Translated
Accounts
US dollars
2,400,000
4,800,000
3,600,000
7,200,000
18,000,000

1,200,000
2,400,000
2,400,000
2,296,800
7,440,000
2,263,200
18,000,000

2,263,200
136,800
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.

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 Europes 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.

Assets
Cash
Accounts receivable
Inventory
Net plant & equipment
Total

Euros
Statement
1,600,000
3,200,000
2,400,000
4,800,000
12,000,000

Liabilities & Net Worth

Accounts payable
Short-term bank debt
Long-term debt
Common stock
Retained earnings
CTA account (loss)
Total

800,000
1,600,000
1,600,000
1,800,000
6,200,000
12,000,000

Just before revaluation

Translated
Exchange Rate
Accounts
(US$/euro)
(US dollars)
1.2000
$
1,920,000
1.2000
3,840,000
1.2180
2,923,200
1.2760
6,124,800
$
14,808,000

1.2000
1.2000
1.2000
1.2760
1.2437

$
$

960,000
1,920,000
1,920,000
2,296,800
7,711,200
(0)
14,808,000

Just after revaluation

Exchange Rate
(US$/euro)
1.5000
1.5000
1.2180
1.2760

1.5000
1.5000
1.5000
1.2760
1.2437

a. The translation gain (loss) is:

$
$

$
$

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.
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.

Translated
Accounts
(US dollars)
2,400,000
4,800,000
2,923,200
6,124,800
16,248,000

1,200,000
2,400,000
2,400,000
2,296,800
7,711,200
240,000
16,248,000

240,000
0
240,000

Problem 11.5 Italiana S.A. (A)

Italiana S.A. is the Italian subsidiary of a British automobile spare parts company. The following is its
balance sheet as at December 31, when the exchange rate between the euro and the British pound was
1.3749/GBP.
Using the current rate method, calculate the contribution of the Italian subsidiary to the translation
exposure of its parent on December 31. Assume that there was no change in Italianicas accounts since the
beginning of the year.
Balance Sheet (thousands of euros)
Assets
Cash
Accounts receivable
Inventory
Net plant & equipment

Liabilities & Net Worth

Current liabilities
Long-term debt
Capital stock
Retained earnings

Calculation of Accounting Exposures:

Exposed assets (all assets)
Less exposed liabilities (curr liabs + lt debt)
a) Net exposure

December 31st
95,000
180,000
125,000
250,000
650,000

60,000
110,000
350,000
130,000
650,000

(000s)
650,000
(170,000)
480,000

Exchange Rate
/

1.3749
1.37
1.37
1.37

1.37
1.37
1.37
1.37

b) Translation
Dec-31
/
1.37
472,762
(123,645)
349,116

Problem 11.6 Italiana S.A. (B)

Please refer to the same balance sheet as in Problem 5. Calculate Italianicas contribution to its British
parents translation loss if the exchange rate on December 31 is 1.4/. Assume that there are no changes
in the accounts of the subsidiary in euros during the last six months.
Balance Sheet (thousands of euros)
Assets
Cash
Accounts receivable
Inventory
Net plant & equipment

Liabilities & Net Worth

Current liabilities
Long-term debt
Capital stock
Retained earnings

Calculation of Accounting Exposures:

Exposed assets (all assets)
Less exposed liabilities (curr liabs + lt debt)
Net exposure

Exchange Rate
(/)
1.40
1.40
1.40
1.40

June 30th
95,000
180,000
125,000
250,000
650,000

60,000
110,000
350,000
130,000
650,000

(000s)
650,000
(170,000)
480,000

1.40
1.40
1.40
1.40

$
$

June 30th
/
1.40
464,286
(121,429)
342,857

Problem 11.7 Italiana S.A. (C)

Calculate Italianas contribution to its parents translation gain/loss using the current rate method if the
exchange rate on September 30 is 1.2/. Assume that there are no changes in the accounts of the
subsidiary in euros during the last nine months.
Balance Sheet (thousands of euros)
Assets
Cash
Accounts receivable
Inventory
Net plant & equipment

Liabilities & Net Worth

Current liabilities
Long-term debt
Capital stock
Retained earnings

Calculation of Accounting Exposures:

Exposed assets (all assets)
Less exposed liabilities (curr liabs + lt debt)
Net exposure

December 30th
95,000
180,000
125,000
250,000
650,000

60,000
110,000
350,000
130,000
650,000

(000s)
650,000
(170,000)
480,000

Exchange Rate
(/)
1.20
1.20
1.20
1.20

1.20
1.20
1.20
1.20

December 30th
(/)
1.20
$
541,667
(141,667)
$
400,000

Problem 11.8 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 31st is
as follows.
Using the data presented, assume that 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
Balance Sheet (thousands)

Assets
Cash
Accounts receivable
Inventory
Net plant & equipment
Total
Liabilities & Net Worth
Accounts payable
Bank loans
Common stock
Retained earnings
CTA account (loss)
Total

Before Devaluation
Thai baht
Statement
24,000
36,000
48,000
60,000
168,000

Exchange Rate
(Baht/US$)
30
30
30
30

18,000
60,000
18,000
72,000
0
168,000

30
30
20
34

After Devaluation
Translated
Accounts
US dollars
800
1,200
1,600
2,000
5,600

Exchange Rate
(Baht/US$)
40
40
40
40

600
2,000
900
2,100
5,600

40
40
20
34

$
$

Translated
Accounts
US dollars
600
900
1,200
1,500
4,200

450
1,500
900
2,100
(750)
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.
TRANSLATION BY THE TEMPORAL METHOD
Balance Sheet (thousands)

Assets
Cash
Accounts receivable
Inventory
Net plant & equipment
Total
Liabilities & Net Worth
Accounts payable
Bank loans
Common stock
Retained earnings
CTA account (loss)
Total

Before Devaluation
Thai baht
Statement
24,000
36,000
48,000
60,000
168,000

Exchange Rate
(Baht/US$)
30
30
30
20

18,000
60,000
18,000
72,000
0
168,000

30
30
20
23

After Devaluation
Translated
Accounts
US dollars
800
1,200
1,600
3,000
6,600

Exchange Rate
(Baht/US$)
40
40
30
20

600
2,000
900
3,100
6,600

40
40
20
23

$
$

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.

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.

Translated
Accounts
US dollars
600
900
1,600
3,000
6,100

450
1,500
900
3,100
150
6,100

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
Balance Sheet (thousands)

Assets
Cash
Accounts receivable
Inventory
Net plant & equipment
Total
Liabilities & Net Worth
Accounts payable
Bank loans
Common stock
Retained earnings
CTA account (loss)
Total

Before Devaluation
Thai baht
Statement
24,000
36,000
48,000
60,000
168,000

Exchange Rate
(Baht/US$)
30
30
30
30

18,000
60,000
18,000
72,000
0
168,000

30
30
20
34

After Devaluation
Translated
Accounts
US dollars
800
1,200
1,600
2,000
5,600

Exchange Rate
(Baht/US$)
25
25
25
25

600
2,000
900
2,100
5,600

25
25
20
34

$
$

Translated
Accounts
US dollars
960
1,440
1,920
2,400
6,720

720
2,400
900
2,100
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.

TRANSLATION BY THE TEMPORAL METHOD

Balance Sheet (thousands)

Assets
Cash
Accounts receivable
Inventory
Net plant & equipment
Total
Liabilities & Net Worth
Accounts payable
Bank loans
Common stock
Retained earnings
CTA account (loss)
Total

Before Devaluation
Thai baht
Statement
24,000
36,000
48,000
60,000
168,000

Exchange Rate
(Baht/US$)
30
30
30
20

18,000
60,000
18,000
72,000
0
168,000

30
30
20
23

After Devaluation
Translated
Accounts
US dollars
800
1,200
1,600
3,000
6,600

Exchange Rate
(Baht/US$)
25
25
30
20

600
2,000
900
3,100
6,600

25
25
20
23

$
$

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.

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.

Translated
Accounts
US dollars
960
1,440
1,600
3,000
7,000

720
2,400
900
3,100
(120)
7,000

Problem 11.10 Cairo Ingot, Ltd.

Cairo Ingot, Ltd., is the Egyptian subsidiary of TransMediterranean Aluminum, a British multinational that fashions automobile engine blocks from aluminum. TransMediterraneans home reporting currency is the British pound. Cairo Ingots 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 Ingots 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.

Balance Sheet of Cairo Ingot, Ltd.

Assets
Cash
Accounts receivable
Inventory
Net plant & equipment
Total

Egyptian pounds
Statement
16,500,000
33,000,000
49,500,000
66,000,000
165,000,000

Liabilities & Net Worth

Accounts payable
Long-term debt
Invested capital
CTA account (loss)
Total

a. Calculation of Actg Exposures:

Exposed assets (all assets)
Less exposed liabilities (c.liabs + lt debt)

Net exposure

24,750,000
49,500,000
90,750,000
165,000,000

Egyptian pounds
165,000,000
(74,250,000)
90,750,000

Before Exchange Rate Change

Translated
Exchange Rate
Accounts
British pounds
(Egyptian /UK)
5.50
3,000,000.00
5.50
6,000,000
5.50
9,000,000
5.50
12,000,000
30,000,000.00

5.50
5.50
5.50

4,500,000.00
9,000,000
16,500,000
30,000,000.00
December 31st
5.50
30,000,000.00
(13,500,000)
16,500,000.00

After Exchange Rate Change

Translated
Exchange Rate
Accounts
British pounds
(Egyptian /UK)
6.00
2,750,000.00
6.00
5,500,000
6.00
8,250,000
6.00
11,000,000
27,500,000.00

6.00
6.00
5.50

4,125,000.00
8,250,000
16,500,000
-1,375,000.00
27,500,000.00
End of Quarter
6.00
27,500,000.00
(12,375,000)
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 ()
Percentage change in the value of the British pound
Translation gain (loss)

16,500,000.00
-8.3%
-1,375,000.00