Can someone explain where beg and ending exposure numbers come from? I know the numbers dont line up but if someone comes across this prob in qbank please help. Thank in advance. This part… 380? 220? Beginning exposure = 380 Ending exposure = (380 + 220) = 600 Change in exposure = (600 – 380) = 220 The Precision Screen Printers (PSP) Company has a foreign subsidiary, the Acer Tool & Die Company, located in the country of Rolivia. The currency of Rolivia is the Chad. The balance sheet and income statement of Acer Tool & Die Company for the year-ended December 31, 2005, is shown below. The balance sheet has been restated using the U.S. dollar as the functional currency. Acer Tool & Die Company Balance Sheet As of December 31, 2005 Chad (millions) Exchange Rate (Chad/US$) U.S. $ (millions) Cash 20 0.25 $80 Accounts receivable 30 0.25 120 Inventory 100 0.3125 320 Fixed assets (net) 500 0.3333 1,500 Total assets 650 $2,020 Accounts payable 50 0.25 $200 Capital stock 380 0.3333 1,140 Retained earnings 220 – 680 Total liabilities and equity 650 2,020 Acer Tool & Die Company Income Statement For year ending December 31, 2005 (Amounts in millions of Chad) Revenues 1,000 Cost of sales 700 Depreciation expense 50 Selling expense 30 Net income 220 The exchange rate at the beginning of 2005 was 0.3333 Chad/US. The exchange rate at the end of 2005 was 0.25 Chad/US$. The average rate for 2005 is 0.3125 Chad/US$. Beginning inventory is 90 Chad. Acer Tool & Die uses FIFO inventory valuation and depreciates fixed assets using the straight-line method. Using the current rate method for the Acer Tool & Die Company, what is the translation adjustment for this period? A) $0. B) $52 loss. C) $231 gain. D) $556 gain. Your answer: A was incorrect. The correct answer was D) 556 gain. When using the current rate method, all assets and liabilities are translated at the current rate, so the net exposure is assets minus liabilities, or total shareholder’s equity. The currency translation adjustment (CTA) is calculated as the sum of the flow effect and holding effect. Flow effect (in ) = change in exposure (in LC) × (ending rate – average rate) Holding gain/loss effect (in ) = beginning exposure (in LC) × (ending rate – beginning rate) Going back to our data in the example: Beginning exposure = 380 Ending exposure = (380 + 220) = 600 Change in exposure = (600 – 380) = 220 Flow effect (in ) = 220 × [(1/0.25) – (1/0.3125)] = 220 × [4 – 3.2] = 176 Holding gain/loss effect (in ) = 380 × [(1/0.25) – (1/0.3333)] = 380 × [4 – 3] = 380 Translation gain (in ) = flow effect + holding gain/loss effect = $176 + $380 = $556
What is the number in the q-bank? It is kind of hard to read without proper formatting.
Yea i saw the format fell apart… no worries i will figure it out. Thanx for looking into it.
Exposure will depend upon which method you are using. if LC = FC you use the all current method if LC does not equal FC you use the temporal method For the all current method, your exposure if your net asset position, because these are what are exposed to the changing interest rates (because all assets and liabilities are measured at the current rate under the all current method, hence the name) For the temporal method, your exposure is your net MONETARY asset position. This is because under this method, only your monetary assets and liabilities are remeasured at the current rate, other non monetary assets are remeasured at the historical rate so it if the there is a change in the exchange rate, these assets and liabilities arent exposed. My last point…dont worry about remeasurement vs. translation. The only thing you should care about is whether or not LC = FC. That is the trigger. CFA doesnt do a good job of using the correct language with this area.