Calculate the gain or loss from translation by both the current rate methodand the temporal method and explain the translation gain or loss in termsof changes in the value of exposed accounts.
Question 4
Bangkok Instruments Ltd. is the Thai subsidiary of a Malaysian seismic instrument
manufacturer. Bangkok Instruments manufactures the instruments primarily for the
oil and gas industry globally, though with recent commodity price increases of all
kinds — including copper — its business has begun to grow rapidly. Sales are
primarily to multinational companies based in South East Asia and Europe.
Bangkok Instruments’ balance sheet in Thai Baht (B) as of March 31 is as follows.
Bangkok Instruments Ltd
Statement of financial position as at March 31
Assets B’000 Liabilities & Net worth B’000
Cash 24,000 Accounts payable 18,000
Accounts Receivable 36,000 Bank loans 60,000
Inventory 48,000 Common stock 18,000
Net plant & equipment 60,000 Retained earnings 72,000
168,000 168,000
Exchange rates for translating Bangkok Instruments’ balance sheet into Ringgit are
as follows:
B11.00/RM April 1 exchange rate after devaluation.
B10.00/RM March 31 exchange rate, before devaluation. All
inventories were acquired at this rate.
B9.00/RM Historic exchange rate at which plant and equipment
were acquired and common stock was issued
The Thai baht depreciated in value from B10.00/RM to B11.00/RM between March
31st and April 1st. There was no change in balance sheet accounts during these
two days.
Required:
(a) Calculate the gain or loss from translation by both the current rate method
and the temporal method and explain the translation gain or loss in terms
of changes in the value of exposed accounts.
(15 marks)
As part of a group-wide restructuring, the parent Company in Malaysia is
considering a proposal from a Thai private equity firm to acquire Bangkok
Instruments Ltd and continue to manufacture the products under a licensing
agreement.
Required:
(b) Critically discuss the impact of continuing the business under the
proposed licensing arrangement.
(10 marks)
(Total: 25 marks)
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