C$1,00,000
C$ 60,000
Accounts receivable
2,20,000
Long-term debt
1,60,000
Inventory
3,20,000
Capital. Stock
6,20,000,
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 $. Assume all accounts remain as they were at the beginning
of the year.
2. AV Ltd, is the Indian affiliate of a US sports manufacturer. AV Ltd manufactures items which
are sold primarily in the United States and Europe. AVs balance sheet in thousands of rupees as
of March 31 is as follows:
Assets
Cash
Accounts receivable
Inventory
Net plant and equipment
Rs 35/$: 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
Rp 4,800
12,800
12,000
20,000
Cash
$3,200
Accounts receivable
8,000
Accounts receivable
8,800
(in $)
Inventory
9,600
Net plant and
16,000
equipment
Total
Rp49,600
Current exchange rates are Spot rate
Rp 2,500/$
Rp 2,800/$
Rp49,600
Rp 3,400/$
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
120
143
2,143
1,915
Accounts receivable
315
407
4,020
3,775
Inventories
612
750
3,950
3,850
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
2,397
2,600
17,123
16,390
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
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 = $1
Rem 31,000
Account receivable
50,000
Inventory
42,000
121,000
Rem 244,000
Rem 56,000
1,
Long-term debt
24,000
Equity
164,000
Rem244,000
Suppose the exchange rate on December 31, 2012, is Remnibi 8.9450 = 1 US$. 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
1850
60
Gross Profit
1,650
190
Operating expenses
650
100
EBIT
$ 1000
MS 90
Interest Expenses
800
70
EBT
$200
Ml 20
$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?