Question

Board Company has a foreign subsidiary that began operations at the start of 2017 with assets of 142,000 kites (the local currency unit) and liabilities of 74,000. During this initial year of operation, the subsidiary reported a profit of 36,000 kites. It distributed two dividends, each for 6,000 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 $0.79 0.77 0.76 0.75 0.74 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 150,000 kites in three months at a forward exchange rate of $0.75/1 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

Board Company

Date of subsidiary operations started                                                     01-01-2017

Investment

                Net Assets                                                                                          142000 Kites

                Net Liabilities                                                                                     74000 Kites

Exchange rate on 01-01-2017                                                                      $0.79    

Profit reported                                                                                                 36000 Kites

Weighted average rate                                                                                 $0.76

Dividend distributed on 01-03-2017                                                         6000 Kites

Exchange rate on 01-03-2017                                                                      $0.77

Dividend distributed on 01-10-17                                                              6000 Kites

Exchange rate on 01-10-2017                                                                      $0.75

a. Translation Adjustment

Board Company			Amt in Kites		Amt in $
Net Asset as on 01-01-17		142000
Net Liabilities as on 01-01-17		74000
Net Investment			68000	$0.79	53720
Change in Investment
Net Profit		36000		$0.76	27360
Less:Dividend on 1/03/17	-6000.00			$0.77	-4620.00
Less:Dividend on 1/03/17	-6000.00	-12000	24000	$0.75	-4500.00
			92000		71960
Net Asset Balance 31/12/17			92000	$0.74	68080
Translation Adjustment 2017					3880
The translation adjustment is negative

b	Journal Entries
01-10-2017	Asset receivbale	150000*0.75	112500
	Contract Payable			112500
	(Being the transaction effect on hedging Is accounted)
31-12-2017	Forward Contract	150000*(0.75-0.74)	1500
	Derivative Income			1500
	(Derivative income accounted)
31-12-2017	Contract Payable	150000*0.75	112500
	Asset receivable			112500
	(The hedging entry reversed on closure)

a. Translation Adjustment after the hedging adjustments

Board Company			Amt in Kites		Amt in $
Net Asset as on 01-01-17		142000
Net Liabilities as on 01-01-17		74000
Net Investment			68000	$0.79	53720
Change in Investment
Net Profit		36000		$0.76	27360
Less:Dividend on 1/03/17	-6000.00			$0.77	-4620.00
Less:Dividend on 1/03/17	-6000.00	-12000	24000	$0.75	-4500.00
			92000		71960
Net Asset Balance 31/12/17			92000	$0.74	68080
Translation Adjustment 2017					3880
Derivative Income					1500
Net Translation Adjustment 2017					2380