Case: Sundance Sporting Goods, Inc.
A. Consolidated Balance Sheet
B. Translation Exposure Report
C. Future Consolidated Balance Sheet
D. Transaction Exposure Report
Sundance Sporting Goods, Inc.
Sundance Sporting Goods, Inc., is a U.S. manufacturer of high-quality sporting goods-principally golf, tennis, and other racquet equipment, and also lawn sports' lt. such as croquet and badminton-with administrative offices and manufacturing fau ties in Chicago, Illinois. Sundance has two wholly owned manufacturing affiliates, one in Mexico and the other in Canada. The Mexican affiliate is located in Mexico City and services all of Latin America. The Canadian affiliate is in Toronto and serves only Canada. Each affiliate keeps its books in its local currency, which is also the functional currency for the affiliate. The current exchange rates are: $1.00 = CD1.25 = Ps3.30 = A1.00 = ¥105 = W800. The nonconsolidated balance sheets for Sundance and its two affiliates appear in the accompanying table.
You joined the International Treasury division of Sundance six months ago after spending the last two years receiving your MBA degree. The corporate treasurer has asked you to prepare a report analyzing all aspects of the translation exposure faced by Sundance as a MNC. She has also asked you to address in your analysis the rela-tionship between the firm's translation exposure and its transaction exposure. After performing a forecast of future spot rates of exchange, you decide that you must do the following before any sensible report can be written.
a. Using the current exchange rates and the nonconsolidated balance sheets for Sundance and its affiliates, prepare a consolidated balance sheet for the MNC according to FASB 52.
b. i. Prepare a translation exposure report for Sundance Sporting Goods, Inc., and Its two affiliates.
ii. Using the translation exposure report you have prepared, determine if any reporting currency imbalance will result from a change in exchange rates to which the firm has currency exposure. Your forecast is that exchange rates will change from $1.00 = CD1.25 = Ps3.30 = A1.00 = ¥105 = w800 to $1.00 = CD1.30 = Ps3.30 = A1.03 = ¥105 = W800.
c. Prepare a second consolidated balance sheet for the MNC using the exchange rates you expect in the future. Determine how any reporting currency imbalance will affect the new consolidated balance sheet for the MNC.
d. i. Prepare a transaction exposure report for Sundance and its affiliates. Determine if any transaction exposures are also translation exposures.
ii. Investigate what Sundance and its affiliates can do to control its transaction and translation exposures. Determine if any of the translation exposure should be hedged.
Nonconsolidated Balance Sheet for Sundance Sporting Goods, Inc. and Its Mexican and Canadian Affiliates, December 31, 2013 (In 000 currency units)
|
Sundance, Inc. (Parent) |
Mexican Affiliate |
Canadian Affiliate |
|
|
|
|
| Assets |
$1,500 |
Ps 1,420 |
CD 1,200 |
| Cash |
2,500a |
2,800 |
1,500 |
| Inventory |
5,000 |
6,200 |
2,500 |
| Investment in Mexican affiliate |
2400 |
|
|
| Investment in Canadian affiliate |
3,600c |
|
|
| Net fixed assets |
12,000 |
11,200 |
5,600 |
| Total assets |
|
|
CD 10,800 |
|
$27,000 |
Ps 21,620 |
|
| Liabilities and Net Worth |
|
|
|
| Accounts payable |
3,000 |
Ps 2,500a |
CD 1,700 |
| Notes payable |
4,000d |
4,200 |
2,300 |
| Long-term debt |
9,000 |
7,000 |
2,300 |
| Common stock |
5,000 |
4,500b |
2,900c |
| Retained earnings |
6,000 |
3,420b |
1,600c |
| Total liabilities and net worth |
27,000 |
Ps 21,620 |
CD 10,800 |
The parent firm is owed psi 320 000 by the Mexican affiliate This sum is included in the parents accounts receivable as 5400.000, translated at Ps3 30 SI 00 The remainder of the parent's (Mexican affiliate's) accounts receivable (payable) is denominated in dollars (pesos)
The Mexican affiliate is wholly owned by the parent firm It is carried on the parent firm's books at 52.400 000 This represents the sum of the common stock (Ps4,500 000) and retained earnings (Ps3 420.000) on the Mexican affiliate's books, translated at Ps3 30/$100
The Canadian affiliate is wholly owned by the parent firm It is carned on the parent firm's books at 53,600.000 This represents the sum of the common stock (CD2.900.000) and the retained earnings (CD I .600.000) on the Canadian affiliate's books. translated at CD 1 25/$100
The parent firm has outstanding notes payable of VI 26 000.000 clue a Japanese bank This sum is carried on the parent firm's books as $1.200000, translated at V105 SI 00 Other notes payable are denominated in US dollar's
The Mexican affiliate has sold on account Al20.000 of merchandise to an Argentine import house This sum is carried on the Mexican affiliate's books as Ps396.000 translated at Al 00 Ps3.30 Other accounts receivable are denominated in Mexican pesos
The Canadian affiliate has sold on account W192 000 000 of merchandise to a Korean importer This sum is carried on the Canadian affiliate's books as CD300 000. translated at W800:CD 1 25 Other accounts receivable are denominated in Canadian dollars.