Suppose that at the start and at the end of the year, Bell U.K., the British subsidiary of Bell U.S., has current assets of £1 million, fixed assets of £2 million, and current liabilities of £1 million. Bell has no long-term liabilities.
a. What is Bell U.K.’s translation exposure under the current/noncurrent, monetary/nonmonetary, temporal, and current rate methods?
b. Assuming the pound is the functional currency, if the pound depreciates during the year from $1.50 to $1.30, what will be the FASB 52 translation gain (loss) to be included in the equity account of Bell’s U.S. parent?
c. Redo part b assuming the dollar is the functional currency. Included in current assets is inventory of £0.5 million. The historical exchange rates for inventory and fixed assets are $1.45 and $1.65, respectively. If the dollar is the functional currency, where does Bell U.K.’s translation gain or loss show up on Bell U.S.’s financial statements?