Question

Board Company has a foreign subsidiary that began operations at the start of 2017 with assets of 153,000 kites (the local currency unit) and liabilities of 96,000. During this initial year of operation, the subsidiary reported a profit of 47,000 kites. It distributed two dividends, each for 7,100 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)	$0.79
March 1, 2017	0.77
Weighted average rate for 2017	0.76
October 1, 2017	0.75
December 31, 2017	0.74

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 205,000 kites in three months at a forward exchange rate of $0.75/1 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.
   Required A Required B Required Assume that the kite is this subsidiary's functional currency. What translation adjustment would Board report for the year 2017? Negative Translation adjustment Required A Required B >
   

Answer 1

Ques a
Net assets, 1/1 (153,000 – 96,000)	57,000	0.79	45,030
Change in net assets:
Net income	47,000	0.76	35,720
Dividends, 3/1	(7,100)	0.77	(5,467)
Dividends, 10/1	(7,100)	0.75	(5,325)
Net assets, 12/31	89,800		69,958
Net assets at current exchange rate, 12/31	89,800	0.74	66,452
Translation adjustment (negative)		$	3,506

Ques b

Date		General Journal	Debit	Credit
01-Oct		No journal entry required
31-Dec		Forward contract	2,050
		Translation adjustment (positive)		2,050
31-Dec		Foreign currency (kites)	151,700
		Cash		151,700
31-Dec		Cash	153,750
		Foreign currency (kites)		151,700
		Forward contract		2,050

Ques c

Ques c
AOCI-net negative translation adjustent	1,456
	(3506-2050)