Suppose that at the start and at the end of the year, Belford U.K., the British subsidiary of Bertrand, a Eurozone-based company, has current assets of £1 million, non-current assets of £2 million, and current liabilities of £1 million. Belford has no long-term liabilities.
a. What is Belford U.K.'s translation exposure under the current/noncurrent, monetary/nonmonetary, temporal, and current rate methods?
b. Assuming the pound is the functional currency, if the pound depreciated during that year from €1.50 to €1.30, what will be the translation gain (loss) to be included in the equity account of Belford's parent, Bertrand?
c. Redo part (b) assuming the euro is the functional currency. Included in current assets is inventory of £0.5 million. The historical exchange rates for inventory and fixed assets are €1.45 and €1.65, respectively. If the euro is the functional currency, where does Belford U.K.'s translation gain of loss show up on Bertrand's financial statements?
Thales' Japanese subsidiary, Thales Japan, has exposed assets of ¥8 billion and exposed liabilities of ¥6 billion. During the year, the yen appreciates from ¥125/€ to ¥95/€.
a. What is Thales Japan's net translation exposure at the beginning of the year in yen? in euros?
b. What is Thales Japan's translation gain or loss from the change in the yen's value?
c. At the start of the next year, Thales Japan adds exposed assets of ¥1.5 billion and exposed liabilities of ¥2 billion. During the year, the yen depreciates from ¥95/$ to ¥130/$. What is Thales Japan's translation gain or loss for this year? What is its total translation gain or loss for the two years?
Suppose that on January 1, American Golf's Mexico subsidiary, Golf de Mexico , had a balance sheet that showed current assets of Mex$1 million; current liabilities of Mex$300,000; total assets of Mex$2.5 million; and total liabilities of Mex$900,000.
On December 31, Golf de Mexico's balance sheet in pesos was unchanged from the figures given above, but the peso had declined in value from $0.1270 at the start of the year to $0.1180 at the end of the year.
What is the translation amount to be shown on American Golf's equity account for the year if the peso is the functional currency? How would your answer change if the dollar were the functional currency?