Christina Company (a U.S.-based company) has a subsidiary in Canada that began operations at the start of 2020 with assets of 143,000 Canadian dollars (CAD) and liabilities of CAD 76,000. During this initial year of operation, the subsidiary reported a profit of CAD 37,000. It distributed two dividends, each for CAD 6,100 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) March 1, 2020 Weighted average rate for 2020 October 1, 2020 December 31, 2020 $0.80 0.78 0.77 0.76 0.75 a. Assume that the Canadian dollar is this subsidiary's functional currency. What translation adjustment would the company report for the year 202O? b. 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 160,000 in three months at a forward exchange rate of $0.76/CAD1. Prepare the journal entries required by this forward contract. c. Compute the net translation adjustment the company will report in accumulated other comprehensive income for the year 2020 under this second set of circumstances. Required A Required B Required C Assume that the Canadian dollar is this subsidiary's functional currency. What translation adjustment would the company report for the year 2020? Negative translation adjustment
Christina Company (a U.S.-based company) has a subsidiary in Canada that began operations at the start of 2020 with assets of 143,000 Canadian dollars (CAD) and liabilities of CAD 76,000. During this initial year of operation, the subsidiary reported a profit of CAD 37,000. It distributed two dividends, each for CAD 6,100 with one dividend declared on March 1 and the other on October 1. Applicable U.S. dollar ($) exchange rates for 1 Canadian dollar follow: January 1, 2020 (start of business) March 1, 2020 Weighted average rate for 2020 October 1, 2020 December 31, 2020 $0.80 0.78 0.77 0.76 0.75 a. Assume that the Canadian dollar is this subsidiary's functional currency. What translation adjustment would the company report for the year 202O? b. 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 160,000 in three months at a forward exchange rate of $0.76/CAD1. Prepare the journal entries required by this forward contract. c. Compute the net translation adjustment the company will report in accumulated other comprehensive income for the year 2020 under this second set of circumstances. Required A Required B Required C Assume that the Canadian dollar is this subsidiary's functional currency. What translation adjustment would the company report for the year 2020? Negative translation adjustment
Chapter9: Taxation Of International Transactions
Section: Chapter Questions
Problem 25P
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Question
Transcribed Image Text:Christina Company (a U.S.-based company) has a subsidiary in Canada that began operations at the start of 2020 with assets of
143,000 Canadian dollars (CAD) and liabilities of CAD 76,000. During this initial year of operation, the subsidiary reported a profit of
CAD 37,000. It distributed two dividends, each for CAD 6,100 with one dividend declared on March 1 and the other on October 1.
Applicable U.S. dollar ($) exchange rates for 1 Canadian dollar follow:
January 1, 2020 (start of business)
March 1, 2020
Weighted average rate for 2020
October 1, 2020
December 31, 2020
$0.80
0.78
0.77
0.76
0.75
a. Assume that the Canadian dollar is this subsidiary's functional currency. What translation adjustment would the company report for
the year 2020?
b. 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 160,000 in three months at a forward exchange rate of $0.76/CAD1. Prepare the
journal entries required by this forward contract.
c. Compute the net translation adjustment the company will report in accumulated other comprehensive income for the year 2020
under this second set of circumstances.
Required A
Required B
Required C
Assume that the Canadian dollar is this subsidiary's functional currency. What translation adjustment would the company
report for the year 2020?
Negative
translation adjustment
Expert Solution
Step 1
Answer -
Computation of Translation Adjustment -
| Particular | CAD | Exchange Rate | USD |
| Net Assets at the beginning (143,000- 76,000) | 67,000 | 0.80 | 53,600 |
| Add: Net Income | 37,000 | 0.77 | 28490 |
| Less : Dividend Paid March 1 | -6100 | 0.78 | -4758 |
| Less : Dividend Paid October 1 | -6100 | 0.75 | -4575 |
| Net Assets at the end of the year | 91,800 | 72,757 | |
| Ending Net Assets at current exchange rate | 91,800 | 0.75 | 68850 |
| Translation Adjustment |
- 3907 Negative |
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