Montevideo Products S.A. is the Uruguayan subsidiary of a US manufacturing compa
ID: 2759109 • Letter: M
Question
Montevideo Products S.A. is the Uruguayan subsidiary of a US manufacturing company. Its balance sheet for January 1 follows. The January 1 exchange rate between the USD and the UYU (Uruguayan peso) is UYU20/USD1.
Assets
Liabilities and Net Worth
Cash
UYU60,000
Current liabilities
UYU30,000
Accounts receivable
UYU120,000
Long term debt
UYU90,000
Inventory
UYU120,000
Capital stock
UYU300,000
Net plant & equipment
UYU240,000
Retained earnings
UYU120,000
Total
UYU540,000
Total
UYU540,000
Determine Montevideo’s contribution to the translation exposure of its parent on January 1 using the current rate method.
Calculate Montevideo’s contribution to its parent’s translation gain or loss if the exchange rate on December 31 is UYU32/USD1. Assume all UYU accounts remain as they were at the beginning of the year. Where and how would you record any difference?
Calculate Montevideo’s contribution to its parent’s translation gain or loss if the exchange rate on December 31 is UYU12/USD1. Assume all UYU accounts remain as they were at the beginning of the year. Where and how would you record any difference?
Assets
Liabilities and Net Worth
Cash
UYU60,000
Current liabilities
UYU30,000
Accounts receivable
UYU120,000
Long term debt
UYU90,000
Inventory
UYU120,000
Capital stock
UYU300,000
Net plant & equipment
UYU240,000
Retained earnings
UYU120,000
Total
UYU540,000
Total
UYU540,000
Explanation / Answer
As per the table above we can see the converted amounts in dollars in columns 3,4, and 5. The second column is the UYU figures given in the question.
Maximum translation exposure the company have is $10,800,000 at January 1.
Assuming all UYU accounts reamin the same as they were at the beginning of the year, the respective gain or loss we have under the two rates are follows(Calculated as the diffrerence between translated amount at first january and the converted amounts at the respective amounts(Refer to Table for Amounts))
At UYU32/1$ - Gain $6,480,000
At UYU12/1$ - Loss of $4,320,000
Either the gain or loss will be adjusted against the profit or loss in the income statement as exchange gain or loss during translation and when there is gain the respective amounts will be increased and vice versa.
$ $ $ UYU 20 32 12 cash 60,000 1,200,000 1,920,000 720,000 Account recievable 120,000 2,400,000 3,840,000 1,440,000 inventory 120,000 2,400,000 3,840,000 1,440,000 Plant and Equipment 240,000 4,800,000 7,680,000 2,880,000 Total 540,000 10,800,000 17,280,000 6,480,000 Current liabilities 30,000 600,000 960,000 360,000 LT debt 90,000 1,800,000 2,880,000 1,080,000 Capital 300,000 6,000,000 9,600,000 3,600,000 Retained earnings 120,000 2,400,000 3,840,000 1,440,000 Total 540,000 10,800,000 17,280,000 6,480,000