Crosswell, Inc., has a 100% interest in a foreign subsidiary whose functional currency is the FC. The interest is acquired when 1 FC = $1.45. As of September 30, 2014, the pre-closing trial balance as of December 31, 2014, is forecasted to be as follows:
Debit (Credit)
Cash .. . . . .. . . .. .. .. . . . .. .. .. ... .......... 40,000 FC
Accounts Receivable . .. . . . . . .. .... . ... 220,000
Inventory . . .. . . .. .. .. . . . .. .. .. ... ........ 320,000
Equipment (net of depreciation). . .. ... . 825,000
Accounts Payable . .. ... . . . . .. .. .. . .. . (360,000)
6% Note Payable . .. ... . . . . .. .. .. . .. .. (400,000)
Accrued Interest Payable. .. . . . . .. .. ... .. (4,000)
Common Stock . .. .. ... . . . . .. .. .. . .. .. (200,000)
Contributed Capital in Excess of Par Value.. (200,000)
Beginning Retained Earnings . . . . .. . .. .. . (140,000)
Sales .. .... .. .. .. . .. . . . . .. .. .. . .. . . ....... (600,000)
Cost of Sales .. .... . .. . . . . .. .... . .. . . ... 366,000
Selling Expenses . .. . . . .. . . .. .. .. ... .. . 55,000
Administrative Expenses . . .. . . .. ... .... . 48,000
Interest Expense.. .. . . . .. . . .. .. .. ... .. .. 30,000
Total. .. .. .... .. . .. . . .. .... .. . . . . . ..... 0 FC
Actual exchange rates between the FC and the dollar are 1 FC = $1.40 as of January 1, 2014, and $1.24 as of September 30, 2014. It is estimated that the year-end 2014 rate will be 1 FC = $1.20 and that the 2014 weighted-average rate will be 1 FC = $1.28.
Crosswell is considering hedging its investment in the foreign subsidiary by borrowing or lending FC as of September 30, 2014. The annual interest rate will be 6% with interest-only payments due at the end of each calendar quarter. At year-end 2013, the cumulative translation adjustment was a $120,000 debit balance. Determine the amount of the FC hedge that would be necessary to offset the 2014 change in the translation adjustment. Assume that the translated value of retained earnings at December 31, 2013, was $200,000.