Question

The U.S. MNC has translated the balance sheet and income statement of a French subsidiary, which keeps its books in euro, then is translated into U.S. dollars using the current/noncurrent method—the reporting currency of the U.S. MNC. The subsidiary is at the end of its first year of operation. The historical exchange rate is $1.60/€1.00 and the most recent exchange rate is $1.50/€. The foreign currency gain or loss for this U.S. MNC is

	Local Currency	Current/Non current
Balance Sheet
Cash	€2,100	$3,150
Inventory (current Value = €1,800)	€1,500	$2,250
Net fixed assets	€3,000	$4,800
Total Assets	€6,600	$10,200
Current liabilities	€1,200	$1,800
Long-term	€1,800	$2,880
Common stock	€2,700	$4,320
Retained earnings	€900
CTA
Total L&E	€6,600	$10,200
Income Statement
Sales Revenue	€10,000	$15,484
COGS	€7,500	$11,613
Depreciation	€1,000	$1,600
NOI	€1,500	$2,271
Tax(40%)	€600	$908
Profit after tax	€900	$1,363
Foreign Exchange gain (loss)
Net income	€900
Dividends	0	0
Addition to Retained Earnings	€900

Answer 1

Solution:

Dollar equivalent Retained earning=Total L&E-current liabilities-long term debt-common stock

=$10,200-$1800-$2880-$4320

=$1200

Since dividend paid for the year is nil,thus net income is equal to retained earning,thus net income is $1280.

Foreing exchange gain/(Loss)=Net income-Profit after tax

=$1200-$1363=($163)

Thus there is foreing exchange loss of $163.