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Board Company has a foreign subsidiary that began operations at the start of 2017 with assets...

Board Company has a foreign subsidiary that began operations at the start of 2017 with assets of 148,000 kites (the local currency unit) and liabilities of 86,000. During this initial year of operation, the subsidiary reported a profit of 42,000 kites. It distributed two dividends, each for 6,600 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) $0.85
March 1, 2017 0.83
Weighted average rate for 2017 0.82
October 1, 2017 0.81
December 31, 2017 0.80

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

b. 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 155,000 kites in three months at a forward exchange rate of $0.81/1 kite. Prepare the journal entries required by this forward contract.

1. Record the entry for the Board being entered into a forward exchange contract.

2. Record the change in the value of the forward contract.

3. Record the purchase of foreign currency.

5. Record the delivery of the foreign currency and the closing of forward contract account.

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

Solutions

Expert Solution

                    
income statement Kites $ exch rate
net income 42000 34440 0.82
retained earnings
Beginning of the year 0 0
net income 42000 34440
dividends
01-Oct -6600 -5346 0.81
01-Mar -6600 -5478 0.83
End of the year 28800 23616
Balance sheet
assets (beginning value) 148000 118400 0.8
Increase in assets 28800 23040 0.8
Total 176800 141440
Liabilities and Equity
liabilities 86000 68800 0.8
Equity Stock 62000 52700 0.85
retained earnings 28800 23616
oci -3676 translation adjustment
Total 176800 141440
part (b)
gain on forward contract = 155000*(0.81-0.80) = 1550
Journal entries:
Dr Cr
Net investment hedge 1550
Gain on Net investment hedge 1550
cash 1550
Net investment hedge 1550
oci = -3676+1550= $ -2126 new translation adjustment

ekkarill92 answered 1 year ago
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