Question

Darvish Company is a European subsidiary of Cubbie Corporation, a U.S. company. Darvish had the following balance sheet at December 31, 20X1:

(in millions of euros)
Cash	€	50
Accounts receivable		75
Inventory		120
Fixed assets, net of accumulated depreciation		480
Total assets	€	725
Note payable	€	280
Common equity		445
Total liabilities and equity	€	725

There are no differences between local GAAP and U.S. GAAP for Darvish. Cubbie translates Darvish’s financial statements into U.S. dollars using the current rate method.

Required:

1. What is the amount of Darvish’s translation exposure at December 31, 20X1?
2. Ignoring any changes in Darvish’s translation exposure that might arise during 20X2, what amount of translation gain or loss arises in 20X2 if the euro’s value falls from $1.20 at December 31, 20X1, to $1.15 at December 31, 20X2?
3. Is the translation gain or loss referred to in Requirement 2 included in net income or in other comprehensive income?

Answer 1

Answer

1. Translation of functinoal currency into Presentation currency

Particulars	Rate	$
Cash	1.20	60(50*1.20)
Total Assets	1.20	870(725*1.20)
Note Payable	1.20	336(280*1.20)
Total labilites and Equity	1.20	870(725*1.20)

2.

Gain or loss on Tanslation=$870-(725*1.13)

=$870-819.25

loss = $50.75

3. The Resulting Exchange Difference are Recognised in other comprehensive income (OCI) and Presented In a separate of components of Equity(i,e FCTR) until disopal of foreign operation.