the functional currency of ABC is the pound. the reporting currency is the dollar. the initial exchange rate $1.00 = £0.67. ABC's nonconsolidated balance sheets and the footnotes to the fina
XYZ Corporation, a U.S. parent firm, has a wholly owned sales affiliate, ABC Ltd., in the United Kingdom. The affiliate was established to service the local market.
Assume that
- the functional currency of ABC is the pound.
- the reporting currency is the dollar.
- the initial exchange rate $1.00 = £0.67.
ABC's nonconsolidated balance sheets and the footnotes to the financial statements indicate that ABC owes the parent firm £200,000. Assume that, XYZ had made an investment of $500,000 in the affiliate.
Find the foreign currency gain or loss for this U.S. MNC translating the
The subsidiary is at the end of its first year of operation. The historical exchange rate is $1.60/€1.00 and the most recent exchange rate is $1.50/€.
|
|
Local Currency |
Current/Non current |
||||||
|
Balance Sheet |
|
|
||||||
|
Cash |
|
€ |
2,100 |
|
|
$ |
3,150 |
|
|
Inventory (current Value = €1,800) |
|
€ |
1,500 |
|
|
$ |
2,250 |
|
|
Net fixed assets |
|
€ |
3,000 |
|
|
$ |
4,800 |
|
|
Total Assets |
|
€ |
6,600 |
|
|
$ |
10,200 |
|
|
Current liabilities |
|
€ |
1,200 |
|
|
$ |
1,800 |
|
|
Long-term |
|
€ |
1,800 |
|
|
$ |
2,880 |
|
|
Common stock |
|
€ |
2,700 |
|
|
$ |
4,320 |
|
|
|
|
€ |
900 |
|
|
|
|
|
|
CTA |
|
|
|
|
|
|
|
|
|
Total L&E |
|
€ |
6,600 |
|
|
$ |
10,200 |
|
|
Income Statement |
|
|
|
|
|
|
|
|
|
Sales Revenue |
|
€ |
10,000 |
|
|
$ |
15,484 |
|
|
COGS |
|
€ |
7,500 |
|
|
$ |
11,613 |
|
|
|
|
€ |
1,000 |
|
|
$ |
1,600 |
|
|
NOI |
|
€ |
1,500 |
|
|
$ |
2,271 |
|
|
Tax(40%) |
|
€ |
600 |
|
|
$ |
908 |
|
|
Profit after tax |
|
€ |
900 |
|
|
$ |
1,363 |
|
|
Foreign Exchange gain (loss) |
|
|
|
|
|
|
|
|
|
Net income |
|
€ |
900 |
|
|
|
|
|
|
Dividends |
|
€ |
0 |
|
|
$ |
0 |
|
|
Addition to Retained Earnings |
|
€ |
900 |
|
|
|
|
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