temporal method gain/loss calculation(fast way)

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annexguy

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it ‘s from schweser practice exam vol1, Exam3 AM, Q50.
Balance sheet of Wayward Inc (in LC)
————————————–12/31/07————12/31/08————correct data
Cash + account receivable——5000—————–5200
Inventory—————————3800—————- 4900
PPE———————————-6200—————–7400
Total assets———————-15000—————17500
account payable—————–2000—————– 2000
long-term debt—————— 9000—————– 9500—————–9000
equity—————————– 4000—————– 6000—————–6500
spot rate on 1/1/08: $0.35per LC
spot rate on 12/31/08: $0.45 per LC
Ave. spot rate during 08: $0.42 per LC
1)With temporal method, how much is the currency translation gain/loss?
under temporal method, parent’s exposure= net monetary asset/lia.
BEG net monetary lia.=2000+9000-5000=6000
END net monetary lia.=2000+9500-5200=6300
during net monetary lia. increase=6300-6000=300
since LC app., it ‘s a translation loss= 6000*(0.45-.35)+300*(.45-.42)=609
and it’s reported on income statement.
2)one day later, accounting team reported 2 errors of data of 12/31/08, equity correct data should be 6500, long term debt 9000. how much is the currency translation gain/loss?
BEG net monetary lia.=2000+9000-5000=6000
END net monetary lia.=2000+9000-5200=5800
during net monetary lia. increase=5800-6000=-200
since LC app., it ‘s a translation loss= 6000*(0.45-.35)+(-200)*(.42-.35)=586
can anyone confirm above calculation?
 
To keep things simple:
- find ending retained earnings (RE1) from BS by A = L + Common Equity + RE1;
- find net income (NI) from: RE1 = RE0 + NI - D;
- find net income before remeasurement G/L (NI_0) from IS;
- Remasurement G/L = NI - NI_0.
To differentiate this from all-current method translation G/L, keep in mind that temporal method records its G/L in IS, so you begin from BS and work back to IS. For all-current method, its G/L is recorded in BS. So you begin from IS and work back to BS.
 
So in the second case, your net monetary liability decreases, so it’s a net monetary asset increase. The currency is appreciating it so I think it should be a gain?
 
eltia Wrote:
——————————————————-
> To keep things simple:
>
> - find ending retained earnings (RE1) from BS by A
> = L + Common Equity + RE1;
>
> - find net income (NI) from: RE1 = RE0 + NI - D;
>
> - find net income before remeasurement G/L (NI_0)
> from IS;
>
> - Remasurement G/L = NI - NI_0.
>
> To differentiate this from all-current method
> translation G/L, keep in mind that temporal method
> records its G/L in IS, so you begin from BS and
> work back to IS. For all-current method, its G/L
> is recorded in BS. So you begin from IS and work
> back to BS.
what if income statement is not given??
 
TheAliMan Wrote:
——————————————————-
> So in the second case, your net monetary liability
> decreases, so it’s a net monetary asset increase.
> The currency is appreciating it so I think it
> should be a gain?
you are part right, monetary asset increased from 5000 to 5200. however, END monetary lia.(2000+9000) >>END monetary asset(5200)
it’s still net monetary lia. (5800)
and LC app. , it is a translation loss.
 
annexguy Wrote:
——————————————————-
> 2)one day later, accounting team reported 2 errors
> of data of 12/31/08, equity correct data should
> be 6500, long term debt 9000. how much is the
> currency translation gain/loss?
> BEG net monetary lia.=2000+9000-5000=6000
> END net monetary lia.=2000+9000-5200=5800
> during net monetary lia. increase=5800-6000=-200
>
the generic formula under both all-current and temporal method:
translation gain/loss= change in exposure (LC)*(current rate-ave. rate)
+ BEG exposure(LC)*(END rate-BEG rate)
loss =-200*(.45-.42)+6000*(.45-.35)=594
 
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