MINI CASE

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, such as croquet and badminton$-$with administrative offices and manufacturing facilities 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: USD$1\mathrm{.}00=$ CAD$1\mathrm{.}25=$ MXN$3\mathrm{.}30=$ ARS$1\mathrm{.}00=$ JPY$105=$ KRW$800.$ 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 an MNC$.$ She has also asked you to address in your analysis the relationship 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 ASC $830.$

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 USD$1\mathrm{.}00=$ CAD$1\mathrm{.}25=$ MXN$3\mathrm{.}30=$ ARS$1\mathrm{.}00=$ JPY$105=$ KRW$800$ to

USD$1\mathrm{.}00=$ CAD$1\mathrm{.}30=$ MXN$3\mathrm{.}30=$ ARS$1\mathrm{.}03=$ JPY$105=$ KRW$800.$

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 $31,2021$

$($in thousand currency units$)$

'The parent firm is owed MXN$1,320,000$ by the Mexican affiliate. This sum is included in the parent's accounts receivable as USD$400,000,$ translated at MXN$3,30/$USD$1,00.$ The

remainder of the parent's $($Mexican affiliate's$)$ accounts receivable $($payable$)$ is denominated in dollars $($pesos$).$

retained earnings $($MXN$3,420,000)$ on the Mexican affiliate's books, translated at MXN$3,30/$USD$1,00.$

retained earnings $($CAD$1,600,000)$ on the Canadian affiliate's books, translated at CAD$1\mathrm{.}25/$USD$1,00.$

Other notes payable are denominated in US$.$ dollars.

ARSI,$00/$MXN$3,30,$ Other accounts receivable are denominated in Mexican pesos.

KRW&OOCADI $25,$ Other accounts receivable are denominated in Canadian dollars.