Question

Board Company has a foreign subsidiary that began operations at the start of 2017 with assets of 157,000 kites (the local currency unit) and liabilities of 104,000. During this initial year of operation, the subsidiary reported a profit of 51,000 kites. It distributed two dividends, each for 7,500 kites with one dividend declared on March 1 and the other on October 1. Applicable exchange rates for 1 kite follow:

January 1, 2017 (start of business)	$0.83
March 1, 2017	0.81
Weighted average rate for 2017	0.80
October 1, 2017	0.79
December 31, 2017	0.78

1. Assume that the kite is this subsidiary’s functional currency. What translation adjustment would Board report for the year 2017?

2. Assume that on October 1, 2017, Board entered into a forward exchange contract to hedge the net investment in this subsidiary. On that date, Board agreed to sell 210,000 kites in three months at a forward exchange rate of $0.79/1 kite. Prepare the journal entries required by this forward contract.

3. Compute the net translation adjustment for Board to report in accumulated other comprehensive income for the year 2017 under this second set of circumstances.

Answer 1

(a)Net asset ending balance = [(157,000-104,000) *0.83] + [ 51,000*0.80] - [ 7,500*0.81] - [7,500*0.79] = 72,790

Net asset ending bal at current rate = [157,000-104,000 + 51,000 – 7,500 – 7,500 ] *0.78 = 89,000 *0.78 = 69,420

Translation adjustment = 72,790 – 69,420 = 3,370[negative balance]

(b)The journal entries are provided as below:

Date	Particulars	Debit	Credit
1st October 2017	No Journal Entry Required
31st December 2017	Forward Contract [210,000*(0.79-0.78)]	$2,100
	Translation Adjustment		$2,100
	(Being to record adjustment in the value of the forward contract)
31st December 2017	Foreign Currency (Kites) (210,000*0.78)	$163,800
	Cash		$163,800
	(Being to record purchase of foreign currency)
31st December 2017	Cash	$165,900
	Foreign Currency (Kites)		$163,800
	Forward Contract		$2,100
	(Being to record delivery of foreign currency and closing of forward contract)

(c)Net translation adjustment for Board to report = -3,370 + 2,100 = -1,270 [negative balance]

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