Question

Halon France, the French subsidiary of a U.S. company, Halon, Inc., has the following balance sheet: Assets (FF thousands)		Liabilities (FF thousands)
Cash, marketable securities Accounts receivable Inventory Net fixed assets	7,000 18,000 31,000 63,000 FF 119,000	Accounts payable Short-term debt Long-term debt Equity	14,000 8,000 45,000 52,000 FF 119,000

a. At the current spot rate of $0.21/FF, calculate Halon France's accounting exposure under the current/noncurrent, monetary/nonmonetary, temporal, and current rate methods.

b. Suppose the French franc depreciates to $0.17. Produce balance sheets for Halon France at the new exchange rate under each of the four alternative translation methods.

c. Calculate the translation gains or losses associated with the FF depreciation for each of the four methods. Relate these gains and losses to the exposure calculations performed in part (a) combined with the exchange rate change. Where would these translation gains or losses show up in the balance sheets prepared for part (b)?

Answer 1

Halon France Requirement a Assuming all assets and liabilities are denominated in francs, under the current/noncurrent method, Halon France's accounting exposure is FF34 million (7+18 +31 - 14 - 8, in millions), or $7.14 million (0.21*34 million). Its monetary/nonmonetary method accounting exposure is -FF42 million (7+ 18 - 14-8-45, in millions), or - $8.82 million (0.21 * - 42 million). Halon France's temporal method exposure is the same as its current/noncurrent method exposure. Under the current rate method, Halon France's exposure is its equity of FF52 million, or $10.92 million (0.21 * 52 million). Requirement b Current/noncurrent rate and temporal methods Assets ($ thousands) Cash, marketable securities Accounts receivable Inventory Net fixed assets 1190 3060 5270 13230 22750 Liabilities ($thousands) Accounts payable Short-term debt Long-term debt Equity 2380 1360 9450 9560 22750 Monetary/nonmonetary method Assets ($thousands) Cash, marketable securities Accounts receivable Inventory Net fixed assets 1190 3060 6510 13230 23990 Liabilities ($thousands) Accounts payable Short-term debt Long-term debt Equity 2380 1360 7650 12600 23990 Current rate method Assets ($ thousands) Cash, marketable securities Accounts receivable Inventory Net fixed assets 1190 3060 5270 10710 20230 Liabilities ($ thousands) Accounts payable Short-term debt Long-term debt Equity 2380 1360 7650 8840 20230 Requirement The translation gain (loss) equals the franc exposure multiplied by the - $0.04 change in the exchange rate. These translation gains (losses) are as follows: current/noncurrent/temporal methods - loss of $1.36 million (-0.04 * 34 million); monetary/nonmonetary method -gain of $1.68 million (-0.04 *-42 million); and current rate method - loss of $2.08 million (-0.04 * 52 million). These gains (losses) show up on the equity account and equal the difference in equity values calculated at the new exchange rate of $0.17/FF and the old exchange rate of $0.21/FF.