Answer:
a. The Board would report translation adjustment of <u>-$3,138</u>.
b. See the journal entries and explanation below.
c. Net translation adjustment is <u>-$1,138.</u>
Explanation:
a. Assume that the kite is this subsidiary's functional currency. What translation adjustment would Board report for the year 2017?
Note: See the attached file for the calculation of translation adjustment.
The board would report a negative (debit) translation adjustment of $3,138. That is,
Translation adjustment = -$3,138
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 200,000 kites in three months at a forward exchange rate of $0.76/1 kite. Prepare the journal entries required by this forward contract.
Board Company
Journal Entries
<u>Date Account titles and Explanation Debit ($) Credit ($) </u>
<u>01 Oct 17 (</u><em><u>No entry) </u></em><u> </u>
12 Dec 17 Forward contract 2,000
Translation adjustment (positive) (w.1) 2,000
<em><u> (To record forward contract change in the value to adjust translation adjustment.) </u></em><u> </u>
12 Dec 17 Foreign currency (kites) (w.2) 152,000
Cash 152,000
<em><u> (To record 200,000 kites purchased at the spot rate of $0.76) </u></em>
12 Dec 17 Cash 154,000
Foreign Currency (kites) 152,000
Forward contract 2,000
<em><u> (To record 200,000 kites delivered, $154,000 received, and close the forward contract account.) </u></em>
Workings:
w.1: Translation adjustment = Number of kites agreed to sell in three months * (Agreed exchange rate on October 1, 2017 per kite - Exchange rate on December 1, 2017) = 200,000 * (0.76 - 0.75) = $2,000
w.2: Foreign Currency (kites) = Number of kites agreed to sell in three months * Agreed exchange rate on October 1, 2017 per kite = 200,000 * 0.76 = $152,000
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.
This can be calculated as follows:
Net translation adjustment = Negative translation adjustment in part a + Positive translation adjustment in part b (i.e. w.1) = -$3,138 + 2,000 = -$1,138
Therefore, net translation adjustment is <u>-$1,138.</u>
