Board Company has a foreign subsidiary that began operations at the start of 201
ID: 2557034 • 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:
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.
1. Record the entry for the Board being entered into a forward exchange contract.
2. Record the change in the value of the forward contract.
3. Record the purchase of foreign currency.
5. Record the delivery of the foreign currency and the closing of forward contract account.
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.
January 1, 2017 (start of business) $0.85 March 1, 2017 0.83 Weighted average rate for 2017 0.82 October 1, 2017 0.81 December 31, 2017 0.80Explanation / Answer
Answer A
For calculating translation adustment, first of all let us understand the translation rate for each components.
1. Net assets i.e. assets minus liabilities, are at the exchange rate in effect of the Balance Sheet date.
In our case, the balance sheet date is December 31, 2017.
Therefore, Net assets = (148000 minus 86000) x 0.80 = 49,600
2. Retained earnings and other equity items including dividends are at historical rates accumulated over time
Therefore, dividends declared on March 01, 2017 = 6600 x .83 = 5478
and, dividends declared on October 01, 2017 = 6600 x 0.81 = 5346
3. Profits or net income from operations are at the weighted average rate
Therefore, profits = 42000 x 0.82 = 34440
Retained earnings = Profit minus dividends = 42000 minus 13200 = 28800
Therefore, balance 33200 is the equity holding.
Referring, point no. 2, equity = 33200 x 0.85 = 28220
Therefore, 2236 will be the translation adjustment. Please refer the below table.
Particulars Amount Method Translation rate Translation amount
Assets 148000 Balance sheet date 0.80 118400
Liabilities -86000 Balance sheet date 0.80 -68800
Dividend March 01 6600 Historical date 0.83 5476
Dividend October 01 6600 Histoical date 0.81 5346
Profits -42000 Weighted avg. rate 0.82 -34440
Equity -33200 Historical date 0.85 -28220
Translation adjustmnt 0 2236
Total 0 0