Shanghai Corporation, the Chinese affiliate of
a U.S. manufacturer, has the balance sheet shown below. The current exchange rate is $.0.15 = CNY1.
| Balance Sheet of Shanghai Corporation (000’s) | |||
| Assets | Liabilities | ||
| Cash | CNY 5,000 | Accounts payable | CNY21,000 |
| Accounts receivable | 14,000 | Long-term debt | 27,000 |
| Inventoriesa (cost = 24,000) | 22,000 | ||
| Fixed assets, net | 39,000 | Stockholders’ equity | 32,000 |
| Total assets | CNY80,000 | Total liab & SE | CNY80,000 |
Required:
a. Translate the Chinese dollar balance sheet of Shanghai Corporation into U.S. dollars at the current exchange rate of $.0.15 12 = CNY1. All monetary accounts in Shanhai’s balance sheet are denominated in Chinese yuan.
b. Assume the Chinese yuan revalues from $0.15 = CNY1 to $0.1875 = CNY1. What would be the translation effect if Shanghai’s balance sheet is translated by the current–noncurrent method? By the monetary-nonmonetary method?
c. Assume instead that the Chinese yuan weakens from $0.15 = CNY1 to $0.1125 = CNY1. What would be the translation effect under each of the two translation methods?
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