Hard Translation Question.

Giant Company is a U.S. firm that produces parts for nuclear reactors. Giant Company has a subsidiary, Grande, Inc., that operates in Mexico and is responsible for designing and manufacturing connection fittings that are vital for the proper operation of its parent company’s reactors: -Giant Company considers the U.S. dollar to be the functional currency of Grande, Inc. -Grande, Inc., began operations January 1, 2001. -Common Stock and Fixed Assets were acquired January 1, 2000. -Inventory is accounted for under the last in, first out (LIFO) cost flow assumption, with a slow rate of turnover. -The inventory in the January 1, 2001, Balance Sheet was acquired on January 1, 2001. Exchange Rates: 1/1/2000: .14/peso 1/1/2001: .12/peso 12/31/2001: .10/peso Avg. 2001 Rate: .11/peso Grande Financials (in pesos): BS: 1/1/2001 12/31/2001 Cash 5,000,000 20,000,000 AR 20,000,000 35,000,000 Inventory 15,000,000 15,000,000 FA 70,000,000 60,000,000 AP 10,000,000 10,000,000 LTD 40,000,000 40,000,000 CS 80,000,000 80,000,000 RE 5,000,000 IS for 2001: Sales 60,000,000 COGS (45,000,000) Depn (10,000,000) NI 5,000,000 Some helpful facts: we use the temporal method here, COGS is translated at average rate, Inventory at historical (i.e. $.12/peso) Question: What is the translation gain or loss for Grande, Inc., for the year ended December 31, 2001? A. $150,000 B. $200,000 C. -$600,000 A golden star to the person who can show how to do this problem without using the stupid flow effect and holding gain formulas, i.e. translate the BS and IS using temporal method and arrive at a retained earnings figure (via the IS since this is the temporal method and so all gains are included in IS) which will balance the translated BS! PS This is difficult, I couldn’t get it to balance even knowing the answer to this problem. What I did was I translated the BS, I knew assets had to be correct so I came up with a RE number that was needed to balance the right side of the BS. I then took this number back to the translated IS to back out the translation gain/loss. Never could get it to work with the answer given by Schweser. CPK, counting on you for this one. Anyone else take this challenge?

Is the answer 150K Choice A?

Yes the answer is in fact A. Did you get it using the formulas or doing the actual translations?

ok, this needs paper, pencil and lots of time and the FRA book and schweser notes OPEN. all this is not possible at work so will try from home. BUT we need to know how to solve a problem like this COLD. agreed everyone? this is most certain to show up on the d-day.

Agreed! I mean I know exactly what I am doing here even without the books I just cant get the crap to balance! Spent 30 fing minutes trying. Really appreciate the input guys, because this will certainly be on the exam.

closest I could get to: Assets: Cash+AR: 55*.1 = 5.5 Inv: 15 * .12 = 1.8 FA: 60*0.14=8.4 Total Assets: 15.7 AP+LTD:50*.1 = 5 CS: 80*.14=11.2 Total AP+CS: 16.2 RE End: (0.5) IS: Sales 60*.11= 6.6 COGS: 45*.11=4.95 Deprn: 10*.14=1.4 NI: 0.25 Is there a RE Translation Balance from previous period? I guess that is what is missing. working backwards from answer should be -0.9. translation adjustment = 0.15 as provided by answer. RE Begin=X X+0.25+0.15=-0.5 X=-0.9?

why is COGS remeasured at Avg rate, is that given?

Which Schweser problem is this? Is it a Book 7 thing cause that thing needs an a$$ kicking.

COGS measured at average rate because because its LIFO and inventory balance is same at beg and end of the year. this is a qbank question. @cpk: exaclty what i got with one minor difference, the 12/31/2001 LTD is 35MM not 40MM (my bad), taking account of this your answer on the RHS of the BS goes down by $500,000 (5MM*.1) yielding Total AP+CS of 15.7 (i.e. they come outbalanced already). Which mean we need: RE Ending=0=RE Beg+NI-Dividends RE Beg=0 NI=$250,000 DIV=0 because RE End has to be zero to balance it must be the case that we take a $250K translation loss on the IS. Exactly what I got, BUT NOT THE DAMN ANSWER!!!

Two things: 1. What Question ID# in QBank is this so I can get a good look at this? It should say at the top of the problem. 2.Wait I remember from a previous problem on this forum that if LIFO is the method, then then COGS is current rate…is that just because the exchange rate was depreciating in that problem?

is it written anywhere in the question what the ending retained earnings was for 12/31/2000? RE End = RE Beg + NI - Dividends + CTA 0 = RE Beg + 250,000 - 0 + CTA. If CTA = 150,000, that would imply RE Beg = -400,000.

Might this have something to do with the fact that FA were purchased on Jan 1 2000 and this is for the year 2001? Would depreciation of FA w/o any other income lead to a pre-existing negative RE?

Schweser question id#87354 Under the temporal method COGS/Inventory is valued at historical cost, so theoretically each purchase of inventory and subsequent use in COGS has a unique historical exchange rate associated with it. Hence, the inventory left on the BS is valued at the oldest of historical rates, whereas the inventory used for COGS must have been purchased throughout the year at varying exchange rates, since we are not given these rates it is safe to assume that they can be translated at the avg. exchange rates (along with this goes the assumption that inventory was purchased evenly throughout the year). @mp: yes if we assume that Schweser is correct (which I have stopped taking as a given) then REbeg would have to be -400K.

I think they want us to do the the remeasurement for year 2000 (as the local RE given was RE = 5,000,000) -> find the RE, which will act as the RE(bgn) in case-2. Case2 is where we do the usual remeasurement given all the rates and chugging the value of RE(bgn) from case-1 in the clean surplus relation and finding the RE(end) PLUG.

^ nope thats the stupid formatting on this site. that 5MM RE is for the year ended 12/31/2001, the RE at 1/1/2001 is zero. The 5MM is from the NI for the year 2001. Again my apologies the formatting shifted this value into the 1/1/2001 column when it should be in the 12/31/2001 column.

ohh ok - then let me try again.

So now I have… RE(end) = -0.5 NI = 0.25 RE(bgn) = 0 D = 0 Loss of 250K… not an answer choice. CP how did you get 150K ???

It was by miscalculation!

Swaption: how/why do you get RE end =-500K? Both I and CPK got RE ending needing to be zero in order for the balance sheet to balance. For this to happen our income which is at 250K now needs to be reduced down to zero, hence the translation loss has to be 250K. Your final answer is inline with my own and CPK but just wondering where you get -500K for RE end.

So I converted the complete BS and got A = 15.7 L = 5 E = CS + RE E = A - L A - L = CS + RE 15.7 - 5 = 11.2 + RE RE = -0.5 [PLUG] converting IS gives NI = 0.25 Clean Surplus RE(E) = RE(B) + NI - D D = 0 RE(B) = 0 NI = RE(E) = -0.5 But after remeasurement NI comes out to be 0.25 [Clean surplus NI] = NI(remeasured) + TGL -0.5 = 0.25 + TGL TGL = -0.75 (Now I am even further away from the answer…)