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Christina Company (a U.S.-based company) has a subsidiary in Canada that began operations at the start...

Christina Company (a U.S.-based company) has a subsidiary in Canada that began operations at the start of 2020 with assets of 140,000 Canadian dollars (CAD) and liabilities of CAD 70,000. During this initial year of operation, the subsidiary reported a profit of CAD 34,000. It distributed two dividends, each for CAD 5,800 with one dividend declared on March 1 and the other on October 1. Applicable U.S. dollar ($) exchange rates for 1 Canadian dollar follow:

January 1, 2020 (start of business) $0.77
March 1, 2020 0.75
Weighted average rate for 2020 0.74
October 1, 2020 0.73
December 31, 2020 0.72

  1. Assume that the Canadian dollar is this subsidiary’s functional currency. What translation adjustment would the company report for the year 2020?

  2. Assume that on October 1, 2020, Christina entered into a forward exchange contract to hedge the net investment in this subsidiary. On that date, the company agreed to sell CAD 280,000 in three months at a forward exchange rate of $0.73/CAD1. Prepare the journal entries required by this forward contract.

  3. Compute the net translation adjustment the company will report in accumulated other comprehensive income for the year 2020 under this second set of circumstances.

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Answer #1

1. The translation adjustment would the company report for the year 2020 is shown below:-

With the help of given formulas:-

2. The Journal entry is prepared below:-

3. The computation of the net translation adjustment is shown below:-

Net translation adjustment = -$3,948 + $2,800

= -$1,148 or $1,148 Negative

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