Professional Documents
Culture Documents
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
800,000
1,600,000
1,600,000
1,800,000
6,200,000
12,000,000
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
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.
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
800,000
1,600,000
1,600,000
1,800,000
6,200,000
12,000,000
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
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)
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
800,000
1,600,000
1,600,000
1,800,000
6,200,000
12,000,000
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
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.
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
800,000
1,600,000
1,600,000
1,800,000
6,200,000
12,000,000
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
1.5000
1.5000
1.5000
1.2760
1.2437
$
$
$
$
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
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
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
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
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 $150,000 would be passed-through to the consolidated income statement.
Translated
Accounts
US dollars
600
900
1,600
3,000
6,100
450
1,500
900
3,100
150
6,100
Assets
Cash
Accounts receivable
Inventory
Net plant & equipment
Total
Liabilities & Net Worth
Accounts payable
Bank loans
Common stock
Retained earnings
CTA account (loss)
Total
Before Devaluation
Thai baht
Statement
24,000
36,000
48,000
60,000
168,000
Exchange Rate
(Baht/US$)
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 $600,000 would be entered into the company's consolidated balance sheet under equity.
Assets
Cash
Accounts receivable
Inventory
Net plant & equipment
Total
Liabilities & Net Worth
Accounts payable
Bank loans
Common stock
Retained earnings
CTA account (loss)
Total
Before Devaluation
Thai baht
Statement
24,000
36,000
48,000
60,000
168,000
Exchange Rate
(Baht/US$)
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.
Translated
Accounts
US dollars
960
1,440
1,600
3,000
7,000
720
2,400
900
3,100
(120)
7,000
Egyptian pounds
Statement
16,500,000
33,000,000
49,500,000
66,000,000
165,000,000
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
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
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
-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