Question

Stilton Company (a U.S.-based company) has a subsidiary in Canada that began operations at the start of 2024 with assets of 146,000 Canadian dollars (CAD) and liabilities of CAD 82,000. During this initial year of operation, the subsidiary reported a profit of CAD 40,000. It distributed two dividends, each for CAD 6,400 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, 2024 (start of business) $ 0.83
March 1, 2024 0.81
Weighted average rate for 2024 0.80
October 1, 2024 0.79
December 31, 2024 0.78

Required:
a. Assume that the Canadian dollar is this subsidiary’s functional currency. What translation adjustment would the company report for the year 2024?

Answer 1

The translation adjustment for Stilton Company's Canadian subsidiary for 2024, assuming the Canadian dollar as the functional currency, is USD 18,016, calculated by translating the net assets at the beginning and end of the year at different rates and taking the difference.

Step-by-step explanation:

The translation adjustment reported for Stilton Company's Canadian subsidiary for the year 2024, assuming that the Canadian dollar is the subsidiary's functional currency, is calculated based on the difference in exchange rates on the beginning and the ending balance sheet dates. To compute this, the net assets (assets minus liabilities) are translated at the current exchange rates at both dates and the difference is the translation adjustment.

The net assets at the beginning of the year were CAD 64,000 (CAD 146,000 - CAD 82,000), which would be translated to USD 53,120 (CAD 64,000 * $0.83). By the end of the year, the net assets had increased by the profit of CAD 40,000, less dividends of CAD 12,800, resulting in net assets of CAD 91,200 (CAD 64,000 + CAD 40,000 - CAD 12,800). These would be translated at the year-end rate to USD 71,136 (CAD 91,200 * $0.78). The translation adjustment is thus USD 18,016 (USD 71,136 - USD 53,120).

This adjustment reflects the impact exchange rates have on the financial statements when the functional currency changes in value relative to the reporting currency, in this case, the U.S. dollar.