Assume that Tesla, a U.S.-based multinational firm, borrows 4 billion yuan for ten years commencing January 2, 2020 for its new factory in Shanghai. According to the terms of the loan, Tesla pays interest at the end of each year and pays back the principle at the end of ten years. On the borrowing date, the relevant financial information is:


Spot = yuan6.9642/$

 i$ = 2.0000%
iYuan = 1.0000%


Suppose that on December 31, 2020, the spot rate is yuan6.7654/$.


1.When Tesla's Chinese yuan debt is translated to dollars at the end of 2020, is there a translation gain or a loss? How much is the gain or loss?


2.If the Chinese yuan is used as the functional currency and the current rate method is used for the translation, how is the translation gain or loss treated in Tesla's consolidated financial statements?


3.If the U.S. dollar is used as the functional currency and the temporal method is used for the translation, how is the translation gain or loss reflected in Tesla's consolidated financial statements?


4.If this were a one-year loan and Tesla had to pay back the principal as well as the interest at the end of 2020, what would be Tesla's total payment in $? What would be the effective borrowing cost?

Answer rating: 100% (QA)

There is a translation gain for Tesla because the yuan weakened against the dollar from the borrowin... View the full answer