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This cumulative translation account (CTA) gain of $600,000 would be entered into the company's consolidated balance sheet under equity.TRANSLATION BY THE TEMPORAL METHODBalance Sheet (thousands)Before Devaluation After Devaluation TranslatedTranslatedThai bahtExchange RateAccountsExchange RateAccountsAssetsStatement(Baht/US$)US dollars(Baht/US$)US dollarsCash30 $800 25 $960 Accounts receivable36,00030 1,200 25 1,440 Inventory48,00030 1,600 30 1,600 Net plant & equipment60,00020 3,000 20 3,000 Total$6,600 $7,000 Liabilities & Net WorthAccounts payable30 $600 25 $720 Bank loans60,00030 2,000 25 2,400 Common stock18,00020 900 20 900 Retained earnings72,00023 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 exchangerates 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 $120,000 would be passed-through to the consolidated income statement.EXPLANATION OF DIFFERENT OUTCOME BY TRANSLATION METHODOLOGYThe Temporal Method results in a translation gain, as opposed to the CTA loss found under the Current Rate Method, because of the different
exchange rates used against Net plant & equipment and the inventory line items. This gain would be impossible under the Current RateMethod because ALL assets are exposed under that method, whereas the Temporal Method carries Net plant & equipment and inventoryat relevant historical exchange rates.Using the original data provided for Bangkok Instruments, assume that the Thai baht appreciated in value from B30/$ 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.TranslatedTranslatedEgyptian poundsExchange RateAccountsExchange RateAccountsAssetsStatementBritish poundsBritish poundsCash16,500,000 5.50 £3,000,000.006.00 £2,750,000.00Accounts receivable33,000,000 5.50 6,000,000 6.00 5,500,000 Inventory49,500,000 5.50 9,000,000 6.00 8,250,000 Net plant & equipment66,000,000 5.50 12,000,000 6.00 11,000,000 Total165,000,000 £30,000,000.00£27,500,000.00Liabilities & Net WorthAccounts payable24,750,000 5.50 £4,500,000.006.00 £4,125,000.00Long-term debt49,500,000 5.50 9,000,000 6.00 8,250,000 Invested capital90,750,000 5.50 16,500,000 5.50 16,500,000 CTA account (loss)- - -£1,375,000.00Total165,000,000 £30,000,000.00£27,500,000.00December 31stEnd of Quarter a. Calculation of Actg Exposures:Egyptian pounds5.50 6.00 Exposed assets (all assets)165,000,000 £30,000,000.00£27,500,000.00Less exposed liabilities (c.liabs + lt debt)(74,250,000)(13,500,000)(12,375,000)Net exposure90,750,000 £16,500,000.00£15,125,000.00b. Change in translation exposure: Gain (Loss)-£1,375,000.00Alternatively, the translation loss arising from the fall in the value of the peso Uruaguayo can be found as follows:£16,500,000.00Percentage change in the value of the British pound-8.3%Translation gain (loss)-£1,375,000.00