Question Use the following information in answering problems 1 and 2.

Use the following information in answering problems 1 and 2.

AvantiMedia is the wholly owned Italian affiliate of ABC, a U.S. based multinational firm.

AvantiMedia produces Projector in Italy from Italian materials and labor. Forty Percent of production is sold within Italy and sixty percent is exported to London. All export sales are invoiced in foreign currencies and export prices are fixed in the currency of the importing country. The corporate income tax rate in Italy is 35%.
The Current exchange rates are as follow: ?.58/$; €0.82/$.
The December 31, 2011, balance sheet is as follows.

AvantiMedia, Balance Sheet, December 31, 2011

Cash 1,500,000 Accounts payable 900,000
Accounts receivable 3,100,000 Short-term bank loan
(due from London & Note payable 1,800,000
?100,000)
Inventory 2,500,000 Long-term debt 1,900,000
Loan(3-years) from U.S.
Bank(I=10%) $150,000
Loan(3-years) from London
Bank (I=8%) ?350,000
Net plant and Common stock 1,100,000
equipment 5,800,000 Retained earnings 7,200,000

Total Assets €12,900,000 Total Liabilities €12,900,000

AvantiMedia Expected Income and Cash Flow Statement (No Deval-uation),Dec. 31 2012

Domestic Sales (450,000 units @ €11.8/unit) 5,310,000
Export Sales (650,000 [email protected] €11.8/unit) 7,670,000
Direct costs (1,000,000 units @ €5.4/unit) 5,400,000
Cash operating expenses (fixed) 1,250,000
Depreciation 340,000
Profit before Interest and tax €5,990,000
Interest 177,360
Pre-tax profit €5,812,640
Income tax expense (35%) 2,034,424
Profit after tax €3,778,216
add back depreciation 340,000
Cash flow from operations in Italy €4,118,216

1- AvantiMedia’s Accounting Exposure:

Assume that on June 21, 2012, the Euro unexpectedly depreciated by 10% to all foreign currencies.

Translate the balance sheet into dollars, using the current rate method and the monetary-non-monetary method assuming that:

Plant and equipment, long-term debt, and common stock were entered on books at a time in the past when the exchange rate was €1.10/$. Inventory was purchased or manufactured during the prior quarter when the average exchange rate was €0.88/$.

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