Measurement of the translation adjustment and hedging an investment. Brico Enterprises, a U.S. corporation, acquired an 80%

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Question:

Measurement of the translation adjustment and hedging an investment. Brico Enterprises, a U.S. corporation, acquired an 80% interest in Bandar Distributors in June 2012 when 1 FC equaled $1.62. Bandar is a foreign corporation whose functional currency is the FC. The condensed preclosing comparative trial balance for Bandar for the current year ended December 31, 2015, is as follows:

Dividends are declared on March 1 of each year and are paid on March 31 of that year. The translated balance in retained earnings at the beginning of 2014 was $227,300.

1. Determine the balance in the cumulative translation adjustment account as of December 31, 2015.

2. Determine how much of the cumulative translation adjustment balance as of December 31, 2015, is traceable to the years prior to 2015.

3. Given your answer to part (2), verify your answer by using an alternative approach to calculating the amount of the cumulative translation adjustment that is traceable to years prior to 2015.

4. Assume that Brico borrowed 100,000 FC on March 1, 2015, as a hedge against its investment in the subsidiary. Determine how much of the parent’s interest in the current-year translation adjustment could have been offset by this hedge assuming that the loan remains unpaid as of year-end 2015.

Relevant exchange rates are as follows: