Calculate, using the Temporal method, the translation gain or loss in USD if the

Question

Calculate, using the Temporal method, the translation gain or loss in USD if the current rate changes from USD0.24/SAR in 2015 to USD0.20/SAR 2016. Assume all balance sheet accounts remain the same.

A. A gain of USD 720 Presented below is the balance sheet of UTM's (U.S.A.) Saudi Arabian subsidiary whose local currency is the riyal (SAR) Assets Cash A/R Inventory Net Plant & Equip SAR 24,000 SAR 36,000 SAR 48,000 SAR 60,000 SAR 168,000 Liabilities and Net Worth A/P Bank loans Common Stock Retained earnings SAR 18,000 SAR 60,000 SAR 18,000 SAR 72,000 SAR 168,000

Explanation / Answer

Here

historical rate = 0.24

current rate = 0.20

Average rate = (0.24+0.2)/2 = 0.22

Convert Balance sheet into USD

Cash = 24000*0.2 = 4800

AR = 36000*0.2 = 7200

Inventory = 48000*0.24 = 11520

PPE = 60000*0.24 = 14400

Total Assets = 4800+7200+11520+14400 = 37920 USD

AP = 18000*0.2 = 3600

Loans = 60000*0.2 = 12000

Coomon stock = 18000*0.24 = 4320

Retained earnings = 72000*0.2 = 14400

Total liabilities = 3600 + 12000 + 4320 + 14400 = 34320

Loss = 37920 - 34320 = 3600 USD = 3600/0.2 = 18000 SAR (Option 3)

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