Translation by the temporal method balance sheet

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This cumulative translation account (CTA) gain of $600,000 would be entered into the company's consolidated balance sheet under equity. TRANSLATION BY THE TEMPORAL METHOD Balance Sheet (thousands) Before Devaluation After Devaluation Translated Translated Thai baht Exchange Rate Accounts Exchange Rate Accounts Assets Statement (Baht/US$) US dollars (Baht/US$) US dollars Cash 30 $800 25 $960 Accounts receivable 36,000 30 1,200 25 1,440 Inventory 48,000 30 1,600 30 1,600 Net plant & equipment 60,000 20 3,000 20 3,000 Total $6,600 $7,000 Liabilities & Net Worth Accounts payable 30 $600 25 $720 Bank loans 60,000 30 2,000 25 2,400 Common stock 18,000 20 900 20 900 Retained earnings 72,000 23 3,100 23 3,100 CTA account (loss) 0 - $(120) Total $6,600 $7,000 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 $120,000 would be passed-through to the consolidated income statement. EXPLANATION OF DIFFERENT OUTCOME BY TRANSLATION METHODOLOGY The Temporal Method results in a translation gain, as opposed to the CTA loss found under the Current Rate Method, because of the different exchange rates used against Net plant & equipment and the inventory line items. This gain would be impossible under the Current RateMethod because ALL assets are exposed under that method, whereas the Temporal Method carries Net plant & equipment and inventoryat relevant historical exchange rates.Using the original data provided for Bangkok Instruments, assume that the Thai baht appreciated in value from B30/$ 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. ฿ 24,000 ฿ 168,000 ฿ 18,000 ฿ 168,000 ฿ 24,000 ฿ 168,000 ฿ 18,000 ฿ 168,000
Problem 11.10 Cairo Ingot, Ltd.a. What is Cairo Ingot’s contribution to the translation exposure of Trans-Mediterranean on December 31st, using the current rate method? Before Exchange Rate Change After Exchange Rate Change Balance Sheet of Cairo Ingot, Ltd. Translated Translated Egyptian pounds Exchange Rate Accounts Exchange Rate Accounts Assets Statement British pounds British pounds Cash 16,500,000 5.50 £3,000,000.00 6.00 £2,750,000.00 Accounts receivable 33,000,000 5.50 6,000,000 6.00 5,500,000 Inventory 49,500,000 5.50 9,000,000 6.00 8,250,000 Net plant & equipment 66,000,000 5.50 12,000,000 6.00 11,000,000 Total 165,000,000 £30,000,000.00 £27,500,000.00 Liabilities & Net Worth Accounts payable 24,750,000 5.50 £4,500,000.00 6.00 £4,125,000.00 Long-term debt 49,500,000 5.50 9,000,000 6.00 8,250,000 Invested capital 90,750,000 5.50 16,500,000 5.50 16,500,000 CTA account (loss) - - -£1,375,000.00 Total 165,000,000 £30,000,000.00 £27,500,000.00 December 31st End of Quarter a. Calculation of Actg Exposures: Egyptian pounds 5.50 6.00 Exposed assets (all assets) 165,000,000 £30,000,000.00 £27,500,000.00 Less exposed liabilities (c.liabs + lt debt) (74,250,000) (13,500,000) (12,375,000) Net exposure 90,750,000 £16,500,000.00 £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 peso Uruaguayo can be found as follows: £16,500,000.00 Percentage change in the value of the British pound -8.3% Translation gain (loss) -£1,375,000.00

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