Board Company has a foreign subsidiary that began operations at the start of 2017 with assets of 155,000 kites (the local currency unit) and liabilities of 100,000. During this initial year of operation, the subsidiary reported a profit of 49,000 kites. It distributed two dividends, each for 7,300 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) $0.80
March 1,2017 0.78
Weighted average rate for 2017 0.77
October 1,2017 0.76
December 31, 2017 0.75

Required:
a. Assume that the kite is this subsidiary's functional currency. What transfation 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 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.
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.

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

Date Account titles and Explanation Debit ($) Credit ($)

01 Oct 17 (No entry)

12 Dec 17 Forward contract 2,000

Translation adjustment (positive) (w.1) 2,000

(To record forward contract change in the value to adjust translation adjustment.)

12 Dec 17 Foreign currency (kites) (w.2) 152,000

Cash 152,000

(To record 200,000 kites purchased at the spot rate of $0.76)

12 Dec 17 Cash 154,000

Foreign Currency (kites) 152,000

Forward contract 2,000

(To record 200,000 kites delivered, $154,000 received, and close the forward contract account.)

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 -$1,138.