Question

rations at the start of 2017 with assets of 155,000 kites (the local currency unit) liabilities of 100,000. During this initial year of operation, the subsidiary reported a profit of 49,000 kites. It distributed two dividends, each for 7,300 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) March 1, 2017 Weighted average rate for 2017 October 1, 2017 December 31, 2017 $0.81 0.79 0.78 0.77 0.76 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 225,000 kites in three months at a forward exchange rate of $0.77/1 Kite. Prepare the journal entries required by this forward contract 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.

Answer 1

20 a) Kites Exchange Rate 0.81 Total Amount 44550 55000 Particulars Beginning Net Assets (155000-100000) Change in Net Assets Net Income Dividends 3/1 Dividends 10/1 Net Assets 12/31 Net Assets at Current Rate Translation adjustment (Negative) 49000 -7300 -7300 89400 89400 0.78 0.79 0.77 38220 -5767 -5621 71382 67944 -3438 0.76 To reord the purchase of 225000 kites at the spot rate of $.76. To record delivery of 225000 kites, receipt of (225000 *.77) = 173250 and close the forward contract account. Debit Credit Date Account title & explanation 1-Jan No Journal Entry 37 2250 (225000*.77) - (225000*.76) 31-Dec Forward Contract Translation Adjustment (Positive) 2250 39 40 171000 31-Dec Foreign Currency (Kites) Cash 171000 42

43 31-Dec Cash 173250 44 Foreign Currency (Kites) 171000 45 Forward Contract 2250 46 47 c) The net negative translation adjustment (Debit balance) to be reported in Accumulated Other Comprehensive Income at 12/31 is (3438-2250) = 1188. 50 Negative Net translation Adjustment 1188