Machinery International (A) Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

1 Question 1

How did the DM 130,719 transaction loss arise? Show how this loss was calculated.

1.1 Answer 1

Basically, the gain and loss arises when a company makes sales or purchases transaction which is recorded at the foreign currency exchange rate. This gain and loss arise due to the nature, extent and time for the transaction payment. Moreover, the gain or loss is allocated in the profit and loss statement and equity portion of the balance sheet. This gain and loss mitigate through the hedging strategy and the discounted rate of the market to assure the investors that, this gain and loss is the non- cash able items. Now deeply concerned with the case material the loss of the DM 130,719 is arise due to the changes of the rate from $0.51 in year 2000 to $0.45 in year 2001.

The loss occurs from the two parts of the balance sheet which current assets and current liabilities and the name of the items are “certificate-of-deposit” and “due-to-parent”. The certificate of deposit is the current assets which come on positive side, shows in the year 2000, $1,000,000 with rate of $0.51 and in the year 2001 shows the same value but different in rate of $0.45. This value result in the US dollar if, the calculation converted into DM dollars then the value in the year 2000 is DM 2,941,176 and in the year 2001 is DM 3,333,333. While on the other side, which is known as current liabilities is “due-to-parent” shows in the year 2000 the US dollar $1,500,000 with rate of 0.51 and in the year the same value with different rate which is $0.45. The current result has shown in DM currency which is DM 1,960,784 in the year 2000 and DM 2,222,222 in the year 2001. By analyzing these all affects, its shows the net impact of loss in term of DM 130,719. For further understanding, this calculation has been given in the Appendix B and mentioned in the excel sheet named as “Projection of Financial Position”.

2 Question 2

Complete Exhibits 1, 2, and 3.

2.1 Answer 2

The exhibits are calculated on the basis of certain assumptions and General Accepted Accounting Principles “GAAP”. The exhibits are completed and mentioned in the “Appendix A, B and C” and annexed with formula in the excel sheet named as Financial Position, Projection of Financial Position and Projection of Income statements respectively. These calculations are showing the results of projection with basis of the following.

The projected exchange rate is US $0.45 = DM 1 of the closing period
The projected average exchange rate $0.457 = DM 1. Use as spot rate
The Inventory is calculated on the production rate $0.435 = DM 1
The Depreciation includes additional DM 10,000 in the DM 150,000 of the additional plants and equipment.
Prepared expense and additional property and plant is taken at rate of $0.415 = DM 1

On the basis of these data, the exhibits are completed and shown in their respective excel sheets. Please go through all excel sheets for the understanding of the formula and their fluctuations...................

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The American company has to decide how to translate its financial DM German subsidiary accounts into U.S. dollars for the state and internal reporting. Rewritten version of the previous case. "Hide
by David F. Hawkins Source: Harvard Business School 6 pages. Publication Date: December 2, 1999. Prod. #: 100012-PDF-ENG