Using facts in the chapter for Ganado Europe, assume as in question Ganado Europe (A) that the exchange rate on January 2, 2006, in Exhibit 11.4 dropped in value from $1.2000/ to $0.9000/ (rather than to $1.0000/). Recalculate Ganado Europes translated balance sheet for January 2, 2006 with the new exchange rate using the temporal rate method.
a. What is the amount of translation gain or loss?
b. Where should it appear in the financial statements?
c. Why does the translation loss or gain under the temporal method differ from the loss or gain under the current rate method?
Translation Using the Temporal Method: euro depreciates from $1.2000/euro to $0.9000/euro.
Just before devaluation
Just after devaluation
Translated
Translated
Euros
Exchange Rate
Accounts
Exchange Rate
Accounts
Assets
Statement
(US$/euro)
(US dollars)
(US$/euro)
(US dollars)
Cash
1,600,000
1.2000
1,920,000
Accounts receivable
3,200,000
1.2000
3,840,000
Inventory
2,400,000
1.2180
2,923,200
Net plant & equipment
4,800,000
1.2760
$ 6,124,800
Total
12,000,000
14,808,000
Liabilities & Net Worth
Accounts payable
800,000
1.2000
960,000
Short-term bank debt
1,600,000
1.2000
1,920,000
Long-term debt
1,600,000
1.2000
1,920,000
Common stock
1,800,000
1.2760
2,296,800
Retained earnings
6,200,000
1.243742
$ 7,711,200
CTA account (loss)
-
$ (0)
Total
12,000,000
$ 14,808,000
Answer & Explanation
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