Question

Board Company has a foreign subsidiary that began operations at the start of 2017 with assets of 134,000 kites (the local currency unit) and liabilities of 58,000. During this Initial year of operation, the subsidiary reported a profit of 28,000 kites. It distributed two dividends, each for 5,200 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) $0.71
March 1, 2017 0.69
Weighted average rate for 2017 0.68
October 1, 2017 0.67
December 31, 2017 0.66
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 220,000 kites In three months at a forward exchange rate of $0.67/1 kite. Prepare the Journal entries required by this forward contract.

Answer 1

Answer: Please refer to Explanation

Explanation:

1 October 2017

No entry required as contract not yet exercised

31st December 2017

DR Forward Contract (220,000*(0.67-0.66)) $2,200

CR Translation Adjustment $2,200

(To record change in value of forward contract )

31st December 2017

DR Foreign Currency (Kites) (220,000*0.66) $145,200

CR Cash $145,200

(To record purchase of foreign currency)

31st December 2017

DR Cash ( 145,200 + 2,200) $147,400

CR Foreign Currency (Kites) $145,200

CR Forward Contract $2,200

(To record delivery of foreign currency and forward contract execution)