Bangkok Instruments, Ltd., is the Thai affiliate of a U.S. seismic instrument manufacturer. Bangkok Instruments manufactures...

 

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Bangkok Instruments, Ltd., is the Thai affiliate of a U.S. seismic instrument manufacturer. Bangkok Instruments manufactures the instruments primarily for the oil and gas industry globally, though with recent commodity price increases of all kinds -- including copper- its business has begun to grow rapidly. Sales are primarily to multinational companies based in the United States and Europe. bankok Instruments' balance sheet in thousands of Thai bahts (B) as of March 31st is as follows. Using the data presented, assume that the Thai baht dropped in value from B30/$ to B40/$ between March 31st and April 1st. Assuming no change in balance sheet accounts between these two days, calculate the gain or loss from translation by both the current rate method and the temporal method. Explain the translation gain or loss in terms of changes in the value of exposed accounts. TRANSLATION BY THE CURRENT RATE METHOD Before Devaluation Balance Sheet (thousands) After Devaluation Translated Translated Thai baht Exchange Rate Assets Statement (Baht/US$) Accounts Exchange Rate US dollars Accounts (Baht/US$) US dollars Cash $24,000 30 800 40 600 Accounts receivable 36,000 30 1,200 40 900 Inventory 48,000 30 1,600 40 1,200 Net plant & equipment 60,000 30 2,000 40 1,500 Total $168,000 $ 5,600 $ 4,200 Liabilities & Net Worth Accounts payable $18,000 30 $ 600 40 450 Bank loans 60,000 30 2,000 40 1,500 Common stock 18,000 20 900 Retained earnings 72,000 34 2,100 ** 20 900 34 2,100 CTA account (loss) 0 (750) Total $168,000 5,600 4,200 Note: Dollar retained earnings before devaluation are the cumulative sum of additions to retained earnings of all prior years, translated at exchange rates in effect in each of those years. This cumulative translation account (CTA) loss of $750,000 would be entered into the company's consolidated balance sheet under equity. TRANSLATION BY THE TEMPORAL METHOD Balance Sheet (thousands) Before Devaluation After Devaluation Assets Thai baht Exchange Rate Statement (Baht/US$) Translated Accounts Exchange Rate US dollars Translated Accounts (Baht/US$) US dollars Cash $24,000 30 800 40 600 Accounts receivable 36,000 30 1,200 40 900 Inventory 48,000 30 1,600 30 1,600 Net plant & equipment 60,000 20 3,000 20 3,000 Total $168,000 $ 6,600 6,100 Liabilities & Net Worth Accounts payable $18,000 30 $ 600 40 $ 450 Bank loans 60,000 30 2,000 40 1,500 Common stock 18,000 20 900 20 900 Retained earnings 72,000 23 3,100 20 3,600 CTA account (loss) 0 (350) Total $168,000 6,600 6,100 Note a: Dollar retained earnings before devaluation are the cumulative sum of additions to retained earnings of all prior years, translated at exchange rates in effect in each of those years. Note b: Retained earnings after devaluation are translated at the same effective rate (see Note a) as before devaluation. The translation gain of $150,000 would be passed-through to the consolidated income statement. Bangkok Instruments, Ltd., is the Thai affiliate of a U.S. seismic instrument manufacturer. Bangkok Instruments manufactures the instruments primarily for the oil and gas industry globally, though with recent commodity price increases of all kinds -- including copper- its business has begun to grow rapidly. Sales are primarily to multinational companies based in the United States and Europe. bankok Instruments' balance sheet in thousands of Thai bahts (B) as of March 31st is as follows. Using the data presented, assume that the Thai baht dropped in value from B30/$ to B40/$ between March 31st and April 1st. Assuming no change in balance sheet accounts between these two days, calculate the gain or loss from translation by both the current rate method and the temporal method. Explain the translation gain or loss in terms of changes in the value of exposed accounts. TRANSLATION BY THE CURRENT RATE METHOD Before Devaluation Balance Sheet (thousands) After Devaluation Translated Translated Thai baht Exchange Rate Assets Statement (Baht/US$) Accounts Exchange Rate US dollars Accounts (Baht/US$) US dollars Cash $24,000 30 800 40 600 Accounts receivable 36,000 30 1,200 40 900 Inventory 48,000 30 1,600 40 1,200 Net plant & equipment 60,000 30 2,000 40 1,500 Total $168,000 $ 5,600 $ 4,200 Liabilities & Net Worth Accounts payable $18,000 30 $ 600 40 450 Bank loans 60,000 30 2,000 40 1,500 Common stock 18,000 20 900 Retained earnings 72,000 34 2,100 ** 20 900 34 2,100 CTA account (loss) 0 (750) Total $168,000 5,600 4,200 Note: Dollar retained earnings before devaluation are the cumulative sum of additions to retained earnings of all prior years, translated at exchange rates in effect in each of those years. This cumulative translation account (CTA) loss of $750,000 would be entered into the company's consolidated balance sheet under equity. TRANSLATION BY THE TEMPORAL METHOD Balance Sheet (thousands) Before Devaluation After Devaluation Assets Thai baht Exchange Rate Statement (Baht/US$) Translated Accounts Exchange Rate US dollars Translated Accounts (Baht/US$) US dollars Cash $24,000 30 800 40 600 Accounts receivable 36,000 30 1,200 40 900 Inventory 48,000 30 1,600 30 1,600 Net plant & equipment 60,000 20 3,000 20 3,000 Total $168,000 $ 6,600 6,100 Liabilities & Net Worth Accounts payable $18,000 30 $ 600 40 $ 450 Bank loans 60,000 30 2,000 40 1,500 Common stock 18,000 20 900 20 900 Retained earnings 72,000 23 3,100 20 3,600 CTA account (loss) 0 (350) Total $168,000 6,600 6,100 Note a: Dollar retained earnings before devaluation are the cumulative sum of additions to retained earnings of all prior years, translated at exchange rates in effect in each of those years. Note b: Retained earnings after devaluation are translated at the same effective rate (see Note a) as before devaluation. The translation gain of $150,000 would be passed-through to the consolidated income statement.

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