Question

Board Company has a foreign subsidiary that began operations at the start of 2017 with assets of 140,000 kites (the local currency unit) and liabilities of 70,000. During this initial year of operation, the subsidiary reported a profit of 34,000 kites. It distributed two dividends, each for 5,800 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)	$0.77
March 1, 2017	0.75
Weighted average rate for 2017	0.74
October 1, 2017	0.73
December 31, 2017	0.72

1. 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 280,000 kites in three months at a forward exchange rate of $0.73/1 kite. Prepare the journal entries required by this forward contract.

Answer 1

The translation of the kites amount at the forward contract payment date must be calculated Payment amount $ 280,000.00 Exchange rate $ 0.72 Value $ 201,600.00 Calculate the amount the kites are worth at the date of the sale Payment amount $ 280,000.00 Current exchange rate $ 0.73 Value $ 204,400.00 Calculate the translation adjustment for the sale Future value $ 201,600.00 Current value $ 204,400.00 Adjustment $ (2,800.00) DR Particulars 10-Jan No entry $ 2,800.00 Dec-31 Forward contract Translation adjustment $ 2,800.00 $ 201,600.00 Foreign currency Cash $ 201,600.00 Cash $ 204,400.00 Foreign currency Forward contract $ 201,600.00 $ 2,800.00