29. Penston Company owns 40 percent (40,000 shares) of Scranton, Inc., which it

Question

29. Penston Company owns 40 percent (40,000 shares) of Scranton, Inc., which it purchased several

years ago for $182,000. Since the date of acquisition, the equity method has been properly applied, and the book value of the investment account as of January 1, 2013, is $248,000. Excess patent cost amortization of $12,000 is still being recognized each year. During 2013, Scranton reports net income of $200,000; $320,000 in operating income earned evenly throughout the year, and a $120,000 extraordinary loss incurred on October 1. No dividends were paid during the year. Penston sold 8,000 shares of Scranton on August 1, 2013, for $94,000 in cash. However, Penston retains the ability to significantly influence the investee. During the last quarter of 2012, Penston sold $50,000 in inventory (which it had originally purchased for only $30,000) to Scranton. At the end of that fiscal year, Scranton’s inventory retained $9,000 (at sales price) of this merchandise, which was subsequently sold in the first

quarter of 2013. On Penston’s financial statements for the year ended December 31, 2013, what income effects would be reported from its ownership in Scranton?

Explanation / Answer

Foreign exchange risk involves the adverse affect on the value of an FI’s assets and liabilities that are located in another country when the exchange rate changes. An FI is net long in foreign assets when the foreign currency-denominated assets exceed the foreign currency denominated liabilities. In this case, an FI will suffer potential losses if the domestic currency strengthens relative to the foreign currency when repayment of the assets will occur in the foreign currency. An FI is net short in foreign assets when the foreign currency-denominated liabilities exceed the foreign currency denominated assets. In this case, an FI will suffer potential losses if the domestic currency weakens relative to the foreign currency when repayment of the liabilities will occur in the domestic currency

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