QUESTION:

 STU Ltd. has a subsidiary in a foreign country, and it needs to translate the financial statements of the subsidiary into the reporting currency of the parent company. The subsidiary has assets worth $500,000 and liabilities worth $300,000 denominated in the foreign currency. The exchange rate at

ANSWER

the end of the year is $1.25 to the foreign currency.

The journal entry to record the translation adjustment is:

DR. Translation reserve (OCI) $100,000

CR. Exchange gain (income) $100,000

Note: The calculation for the translation reserve is the difference between the assets and liabilities multiplied by the exchange rate: ($500,000 - $300,000) x 1.25 = $100,000.

Here's the tabulated working calculation for the journal entry to record the translation adjustment:

To record the translation adjustment, we need to credit the exchange gain account for the amount of the adjustment ($100,000), and debit the translation reserve account for the same amount. Since the translation adjustment is recognized in other comprehensive income (OCI), the translation reserve account is debited in OCI.

The journal entry would be:

Debit translation reserve (OCI) for $100,000

Credit exchange gain (income) for $100,000

Therefore, the journal entry to record the translation adjustment would be:

Translation reserve (OCI) - $100,000

Exchange gain (income) - $100,000

Note: The calculation for the translation reserve is the difference between the assets and liabilities multiplied by the exchange rate, which is ($500,000 - $300,000) x 1.25 = $100,000.