BRT is a UK-based company that uses the British pound as its reporting currency. BRT establishes a wholly owned subsidiary, GRM, in Germany on 31 Dec 20X1 by investing £1,000,000 when the exchange rate between the pound and the euro is £1 = €1.20. The equity investment of £1,000,000 is converted into €1,200,000 to begin operations. In addition, GRM borrows €500,000 from local banks on 31 Dec 20X1. On 31 Dec 20X1, GRM purchases plant and equipment that cost €1,100,000, purchases inventory that costs €350,000 and retains €250,000 in cash. During the year 20X2, GRM engages in no transactions. During this period, the euro weakens against the pounds such that the exchange rate on 31 Dec 20X2 is £1 = €1.50.

(a) Calculate GRM’s contribution to the translation exposure of BRT (net exposed assets) on 31 Dec 20X1, using the current rate method of translation. (2 marks)

(b) Calculate the translation gain or loss to BRT in 20X2, using the current rate method of translation

Answer rating: 100% (QA)

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