Page 190 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

Unit 11: Management of Translation Exposure

Account loss by monetary/non-monetary method is ($ 5.36) on March 31st Notes
($7.13) on April 1st
March 31st April 1st
Exposed assets $262.50 $250.00
Exposed liabilities $225.00 $214.28
Net exposed ($37.5) ($35.72)

Problem 3:
ABC House Ltd 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. Non-consolidated financial
statements for both ABC and XYZ are as follows (in thousands):

Assets XYZ Inc. ABC Ltd
Cash $8,000 £ 2,000
Accounts receivable 10,000 4,000
Inventory 8,000 2,000
Net plant and equipment 10,000 6,000
Investment 4,500
Total $40,500 £ 14,000

Liabilities and Net Worth
Current liabilities $ 22,000 £ 4,000
5-year term loan 4,000
Capital stock 9,000 2,000
Retained earnings 9,500 4,000
Total $ 40,500 £ 14,000
(a) Prepare a consolidated balance sheet for XYZ Ltd.
(b) What is ABC Ltd’s accounting exposure in dollars? Use the current rate method of calculation.

(c) Before any business activities take place, the pound sterling depreciates 9% in value relative
to the dollar. What is the new spot rate?
(d) What is XYZ accounting loss or gain, if any, by the current rate method/monetary/
non-monetary method?
Solution:
Balance sheet for ABC Ltd in dollars:

Assets Rate $ Liabilities Rate $
Cash £2,000 1.50 3,000 Current liabilities £4,000 1.5 6,000
Accounts receivable 4,000 1.50 6,000 5-year term loan 4,000 1.5 6,000
Inventory 2,000 1.50 3,000 Capital Stock 2,000 1.5 3,000
Plant & equipment 6,000 1.50 9,000 Retained earnings 4,000 1.5 6,000
£14,000 $21,000 £14,000 $21,000

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