Board Company has a foreign subsidiary that began operations at the start of 201
ID: 2511251 • Letter: B
Question
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) March 1, 2017 Weighted average rate for 2017 October 1, 2017 December 31, 2017 $0.85 0.83 9.82 0.81 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 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.Explanation / Answer
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