Professional Documents
Culture Documents
CHAPTER 7
Foreign Currency Transactions and Hedging
MULTIPLE CHOICE
1.
$20,000 asset
$20,000 liability
$30,000 asset
$30,000 liability
ANS: a
($0.0092 - $0.009) x 100,000,000 = $20,000
2.
ANS: d
Use the following information on the U.S. dollar value of the euro to answer questions 3 7
below:
Spot rate
$ 1.25
1.28
1.26
On October 30, 2010, a company enters a forward contract to sell 100,000 on April 30, 2011.
The companys accounting year ends December 31.
3.
2010
$1,000 gain
$1,000 loss
$3,000 gain
$2,000 loss
2011
$4,000 gain
$4,000 gain
$6,000 gain
$6,000 gain
ANS: a
2010: Gain on receivable, ($1.28 - $1.25) x 100,000
Loss on forward, ($1.32 - $1.30) x 100,000
Net gain
= $3,000
= $2,000
$1,000
= $2,000
= $6,000
$4,000
4.
$126,000
$122,000
$130,000
$124,000
ANS: c
(100,000 x $1.26) + ($1.30 - $1.26) x 100,000 = $130,000
5.
No effect
$2,000 loss
$3,000 gain
$1,000 gain
ANS: a
The gain on the firm commitment and loss on the forward contract are ($1.32 - $1.30) x
100,000 = $2,000, and they offset for a zero effect on 2010 income.
6.
No effect
$2,000 loss
$3,000 gain
$1,000 gain
ANS: a
The loss on the forward contract is reported in other comprehensive income.
7.
The $1,000 total loss on the forward contract is reclassified from other
comprehensive income as an adjustment to sales revenue.
The $4,000 total gain on the forward contract is reclassified from other
comprehensive income as an adjustment to sales revenue.
The 2011 $6,000 gain on the forward contract is recognized as a hedging gain on
the 2011 income statement.
The 2010 $2,000 loss on the forward contract is recognized as a hedging loss on
the 2010 income statement.
ANS: b
The total gain on the forward contract is ($1.30 - $1.26) x 100,000 = $4,000. Changes
in the value of the forward are reported in other comprehensive income until the hedged
forecasted transaction is reported in income. In this case, the forecasted transaction
results in sales revenue, reported in 2011.
8.
Fiscal 2012
$1,000 exchange loss
$1,000 exchange gain
No effect
No effect
Fiscal 2013
$3,000 exchange gain
$3,000 exchange loss
$2,000 exchange loss
$2,000 exchange gain
ANS: b
Fiscal 2012 exchange gain = ($1.31 - $1.30) x 100,000 = $1,000
Fiscal 2013 exchange loss = ($1.31 - $1.28) x 100,000 = $3,000
9.
Fiscal 2012
$1,000 exchange loss
$1,000 exchange gain
No effect
No effect
Fiscal 2013
$3,000 exchange gain
$3,000 exchange loss
$2,000 exchange loss
$2,000 exchange gain
ANS: a
Fiscal 2012 exchange loss = ($1.31 $1.30) x 100,000 = $1,000
Fiscal 2013 exchange gain = ($1.31 $1.28) x 100,000 = $3,000
$20,000
$25,600
$26,000
$26,400
ANS: d
20,000
11.
x $1.32 = $26,400
No gain or loss
$400 gain
$400 loss
$1,667 gain
ANS: b
20,000 x ($1.32 - $1.30) = $400 gain
$136,000
$139,000
$ 73,530
$ 71,942
ANS: a
100,000 x $1.36 = $136,000
13.
-0$3,000 gain
$3,000 loss
$3,919 loss
ANS: b
100,000 x ($1.39 - 1.36) = $3,000 gain
14.
$1.52
$1.54
$1.59
$1.62
ANS: d
Any rate above $1.60 leads to higher U.S. dollar value of payment received than under the
forward contract.
15.
If the spot price for zloty is $.36 on December 20, the company will gain $359,800
on the option.
If the spot price for zloty is $.24 on December 20, the company will lose $200 on
the option.
If the spot price for zloty is $.27 on December 20, the company will lose $20,200
on the option.
If the spot price for zloty is $.30 on December 20, the company will gain $24,800
on the option.
ANS: b
The option gives the holder the option to buy 1,000,000 zloty for $250,000. At a spot
price of $.24/zloty, the option has no value and the holder loses its $200 investment.
16.
October 1, 2013
December 31, 2013
February 1, 2014
Spot rate
$0.89
0.88
0.82
Forward
rate for 2/1
delivery
$0.85
0.84
0.82
For the import company, what is the income statement effect of the above information?
a.
b.
c.
d.
ANS: a
2013:
forward contract: ($.85 - $.84) x A$100,000 =
payable: ($.89 - $.88) x A$100,000 =
2014:
forward contract: ($.84 - $.82) x A$100,000 =
payable: ($.88 - $.82) x A$100,000 =
$1,000 loss
1,000 gain
-0$2,000 loss
6,000 gain
$4,000 gain
17.
$1,020,000
$1,140,000
$1,200,000
$1,260,000
ANS: b
$1.05 x FC1,200,000 =
($1.05 - $.95) x FC1,200,000 =
$1,260,000
(120,000)
$1,140,000
$20,200 gain
$20,200 loss
$20,000 gain
$20,000 loss
ANS: d
1,000,000 x ($1.20 - $1.18) = $20,000 loss
19.
$0
$11,800
$11,900
$12,000
ANS: b
10,000
x $1.18 = $11,800
Spot rate
$1.40
1.42
1.43
$1.41
1.415
1.43
20.
$14,100,000
$14,150,000
$14,200,000
$14,300,000
ANS: c
Changes in the value of the forward contract remain in other comprehensive income
until the merchandise is sold. The merchandise is reported at the spot rate at the date of
purchase, $1.42.
21.
No effect
$100 loss
$100 gain
$50 gain
ANS: a
Changes in the value of the forward are reported in other comprehensive income.
The $100 loss on the payable is exactly offset by a reclassification of $100 out of other
comprehensive income, so there is no net effect on income.
22.
$14,100,000
$14,150,000
$14,200,000
$14,300,000
ANS: a
At the end of the year, other comprehensive income has a credit balance of $100. When
the merchandise is sold, it is reclassified as a reduction in cost of goods sold; $14,100,000
= $14,200,000 - $100,000.
Journal entries related to questions 20 22 (in thousands):
July 30
Inventory
14,200
Accounts payable
14,200
Investment in forward
50
Other comprehensive income
September 30
Exchange loss
50
100
Accounts payable
100
Investment in forward
150
Other comprehensive income
150
100
Exchange gain
100
Accounts payable
14,300
Cash
Investment in forward
14,100
100
Inventory
14,100
200
14,200
Use the following information on the U.S. dollar value of the euro to answer questions 23 25:
Spot rate
$ 1.30
1.33
1.35
ANS: c
The change in value of the forward is reported in income as the forward rate changes. For
2012, the gain is ($1.35 - $1.31) x 100,000 = $4,000.
24.
ANS: d
The change in value of the forward is reported in income as the forward rate changes. For
2011, the loss is ($1.31 - $1.29) x 100,000 = $2,000
25.
$129,000
$130,000
$131,000
$135,000
ANS: a
The equipment is recorded at the spot rate of $1.35 x 100,000 = $135,000, adjusted for
the $6,000 [= $1.35 - $1.29) x 100,000] gain on the forward contract.
26.
ANS: d
27.
Spot markets
Forward markets
Futures markets
Direct markets
ANS: b
28.
The gain on the receivables and the loss on the forward are reported on the income
statement.
The gain on the receivables and the loss on the forward are reported in other
comprehensive income.
The loss on the receivables and the gain on the forward are reported on the income
statement.
The loss on the receivables and the gain on the forward are reported in other
comprehensive income.
ANS: c
29.
The gain on the payables and the loss on the forward are reported on the income
statement.
The gain on the payables and the loss on the forward are reported in other
comprehensive income.
The loss on the payables and the gain on the forward are reported on the income
statement.
The loss on the payables and the gain on the forward are reported in other
comprehensive income.
ANS: c
30.
ANS: d
31.
Reported on the income statement if the forwards qualify for special hedge
accounting and in other comprehensive income if they dont qualify.
Reported as a direct adjustment to retained earnings if they qualify for special
hedge accounting and on the income statement if they dont qualify.
Reported in other comprehensive income if they qualify for special hedge
accounting and on the income statement if they dont qualify.
Not reported if they qualify for special hedge accounting and reported on the
income statement if they dont qualify.
ANS: c
32.
ANS: b
33.
ANS: a
34.
ANS: d
35.
ANS: c
36.
ANS: c
37.
The U.S. company uses the forward contract to hedge a loan denominated in
euros.
The U.S. company uses the forward contract to hedge a forecasted purchase of
merchandise from a French supplier.
The U.S. company uses the forward contract to hedge a planned purchase of
commodities from an Italian supplier.
The U.S. company uses the forward contract to hedge an expected acquisition of
commodities from a Belgian company.
ANS: a
38.
You have inside information that the $/yen rate is going to rise, so you invest in a
financial derivative that allows you to gain if the $/yen rate rises.
You have inside information that the $/euro rate is going to fall, so you invest in a
financial derivative that allows you to gain if the $/euro rate falls.
As part of your normal business transactions, you are exposed to financial risk.
You invest in financial derivatives to increase potential gains from financial risk.
As part of your normal business transactions, you are exposed to financial risk.
You invest in financial derivatives to reduce that risk.
ANS: d
39.
ANS: a
40.
Market value
Cost
Lower of cost or market value
Not reported
ANS: a
41.
ANS: b
42.
ANS: c
43.
A decrease in the exchange rate will generate an exchange gain on the bonds
payable
If the spot rate rises to $1.35/ one year hence, when the interest payment is
accrued, the interest expense will be recorded at $13,500,000
If XYZ desires to hedge these bonds, it will have to purchase euros forward
The bonds payable will be carried at $125,000,000 until they mature
ANS: d
44.
The average spot rate for the period the interest covers
The spot rate when the loan was made
The spot rate when the interest is recorded
The forward rate for delivery when the interest must be paid
ANS: c
45.
ANS: a
46.
Disclose the fair values of derivatives investments in the footnotes of the financial
statements, and report hedged assets and liabilities at fair value on the balance
sheet.
Report the fair values of derivatives investments on the balance sheet, and report
hedged assets and liabilities at fair value on the balance sheet.
Report the fair values of derivatives investments on the balance sheet, and match
gains and losses on hedge investments and hedged assets and liabilities on the same
income statement.
Report hedged assets and liabilities at fair value on the balance sheet, and match
gains and losses on hedge investments and hedged assets and liabilities on the same
income statement.
ANS: c
47.
ANS: d
48.
ANS: a
49.
The forward contract appears as a current asset on the companys balance sheet.
The forward contracts reported value exactly offsets the reported foreign currency
obligation, with no net balance sheet disclosure.
The gain on the forward contract adds to other comprehensive income.
The gain on the foreign currency obligation adds to other comprehensive income.
ANS: a
50.
Reporting foreign currency derivative positions at cost rather than at market value
Reporting gains and losses on cash flow hedges as adjustments to the carrying
value of related asset acquisitions
Reporting gains and losses on firm commitment hedges as adjustments to the
carrying value of related asset acquisitions
Reporting foreign currency derivative positions at market rather than at cost
ANS: b
PROBLEMS
1.
Topic: Fair value hedge of receivables and payables, cash flow hedge of
forecasted transaction
LO 4, 6
Use the following exchange rates for the Canadian dollar to answer the three questions
below concerning a U.S. companys foreign exchange activities. The companys
accounting year ends December 31.
Spot rate
$ 0.82
0.85
0.83
Required
Answer the following questions.
a.
b.
c.
The company enters a forward contract on October 31, 2010 to hedge a forecasted
purchase of merchandise for C$100,000 on March 31, 2011. On March 31 it takes
delivery of the merchandise, closes the forward and pays for the merchandise. It
sells the merchandise in May. What are the balances?
i.
Investment in forward, December 31, 2010
ii.
Cost of goods sold on May sale
ANS:
2.
a.
i.
ii.
iii.
b.
i.
ii.
c.
i.
ii.
October 1, 2012
November 1, 2012
December 31, 2012
March 1, 2013
Spot rate
$1.29
1.30
1.35
1.37
Required
Answer the following questions:
a.
b.
Assume the same facts as in a. above, but the U.S. company issues a purchase
order on October 1, 2012 before taking delivery on November 1. On October 1
the company also enters a forward contract to hedge its FX risk, for delivery of
pounds on March 1, 2013. What amounts will appear on the financial statements
of the U.S. company for:
i.
Investment in forward contract, December 31, 2012 balance sheet
ii.
ANS:
3.
a.
i.
ii.
iii.
b.
i.
ii.
Spot rate
$ 1.25
1.28
1.26
Required
Answer the following questions.
a.
b.
c.
On November 30, 2010, Import Express forecasts that it will need to buy
merchandise for 1,000 from an Italian supplier at the end of May, 2011. It plans
to pay for the merchandise as soon as it is delivered. On November 30, 2010,
Import Express agrees to buy 1,000 (forward purchase) for delivery on May 31,
2011. The forward contract qualifies as a cash flow hedge of the forecasted
purchase of merchandise. The merchandise is actually delivered on May 31, 2011.
Import Express closes the forward and immediately pays the supplier. The
merchandise is subsequently sold to a U.S. customer later in 2011. Make the
journal entries necessary to record these events:
i.
December 31, 2010: Adjust the investment in forward contract.
ii.
May 31, 2011:
(1)
Adjust the investment in forward contract.
(2)
Close out the forward contract.
(3)
Take delivery of the merchandise and pay for it.
iii.
Record cost of sales for 2011.
ANS:
a.
11/30
Inventory
1,250
Accounts payable
12/31
Exchange loss
1,250
30
Accounts payable
5/31
Accounts payable
30
20
Exchange gain
Accounts payable
20
1,260
Cash
i.
ii.
ii.
1,260
b.
11/30
Inventory
1,250
Accounts payable
12/31
Exchange loss
1,250
30
Accounts payable
Investment in forward
30
20
Exchange gain
5/31
Accounts payable
20
20
Exchange gain
Exchange loss
20
60
Investment in forward
Foreign currency
Investment in forward
60
1,260
40
Cash
Accounts payable
1,300
1,260
Foreign currency
i.
ii.
1,260
c.
i.
Investment in forward
20
Other comprehensive income
ii.
(1)
Other comprehensive income
20
60
Investment in forward
60
(2)
Foreign currency
Investment in forward
1,260
40
Cash
1,300
(3)
Inventory
1,260
Foreign currency
1,260
iii.
Cost of goods sold
1,300
Other comprehensive income
Inventory
40
1,260
4.
Topic: Forward purchase, cash flow hedge that becomes a fair value hedge
LO 4, 5, 6
Use the following information on exchange rates for the euro to answer the question
below.
October 1, 2011
December 31, 2011
January 31, 2012
March 31, 2012
April 30, 2012
Spot
rate
$1.45
1.50
1.52
1.56
1.60
Forward
rate for
4/30/12
delivery
$1.48
1.53
1.55
1.58
1.60
On October 1, 2011, a U.S. company forecasts that it will take delivery of merchandise
from a supplier in Portugal for 10,000,000 around the end of March, 2012, with payment
expected to be made, in euros, about one month later. The company closes its books on
December 31. The following events occur:
1.
2.
3.
4.
5.
6.
October 1, 2011: The company enters a forward purchase agreement for delivery
of 10,000,000 on April 30, 2012. This position qualifies as a hedge of the
forecasted transaction described above. No initial investment is required.
December 31, 2011: The company closes its books.
January 31, 2012: The company issues a purchase order to the supplier for
10,000,000 in merchandise, to be delivered March 31, 2012.
March 31, 2012: The company takes delivery of the merchandise.
April 30, 2012: The company closes the forward contract and pays the supplier
10,000,000.
May 15, 2012: The company sells the merchandise to a U.S. customer for
$22,500,000.
Required
Prepare the journal entries to record the above events on the indicated dates.
ANS:
December 31, 2011: End of year adjusting entry:
Investment in forward
Other comprehensive
income
January 31, 2012:
Adjust the investment:
Investment in forward
Other comprehensive
income
500,000
500,000
200,000
200,000
Adjust for the period January 31 - March 31, and take delivery of
the merchandise.
Investment in forward
300,000
Other comprehensive
income
300,000
Exchange loss
300,000
Firm commitment
300,000
300,000
Exchange gain
Inventory
Firm commitment
15,300,000
300,000
Accounts payable
300,000
15,600,000
Adjust for the period March 31 to April 30, close the forward
contract and pay the supplier.
Investment in forward
200,000
Other comprehensive
income
200,000
Exchange loss
400,000
Accounts payable
400,000
400,000
Exchange gain
400,000
Foreign currency
16,000,000
Investment in forward
Cash
Accounts payable
1,200,000
14,800,000
16,000,000
Foreign currency
Cost of goods sold
Other comprehensive income
14,800,000
500,000
Inventory
16,000,000
15,300,000
5.
March 1, 2012
June 30, 2012
August 15, 2012
Spot rate
$1.50
1.60
1.65
A U.S. company buys from suppliers in Germany, and pays the suppliers in euros. The
U.S. companys accounting year ends June 30. On March 1, 2012, the company sends a
purchase order to a German supplier for 1,000,000 in merchandise, payable in euros,
delivery to take place August 15, 2012. On the same day the company enters into a
forward contract for delivery of 1,000,000 on August 15. The forward qualifies as a
hedge of a firm commitment. On August 15, the company closes the forward contract,
takes delivery of the merchandise, and pays the supplier. The company sells the
merchandise to its customers on August 31, 2012.
Required
What amounts will appear on the financial statements of the U.S. company for:
a.
b.
ANS:
a.
b.
6.
November 1, 2012
December 31, 2012
January 10, 2013
March 1, 2013
Spot rate
$ 1.40
1.41
1.44
1.45
Required
For each date below, prepare the necessary journal entries to record the events and/or
adjustments needed.
a.
b.
c.
d.
ANS:
a.
December 31, 2012
Investment in forward
10,000
Exchange gain
Exchange loss
10,000
10,000
Firm commitment
10,000
5,000
Exchange gain
Exchange loss
5,000
5,000
Firm commitment
Rate changes from $1.43 to $1.435.
Inventory
Firm commitment
5,000
1,425,000
15,000
Accounts payable
c.
March 1, 2013
Exchange loss
1,440,000
10,000
Accounts payable
10,000
15,000
Exchange gain
Rate changes from $1.435 to $1.45.
Foreign currency
15,000
1,450,000
Cash
Investment in forward
Accounts payable
1,420,000
30,000
1,450,000
Foreign currency
d.
April 1, 2013
Cash
1,450,000
2,000,000
Sales revenue
Cost of goods sold
1,425,000
Inventory
2,000,000
1,425,000
7.
Spot rate
$1.42
1.38
1.36
1.35
Required
Answer the following questions:
a.
b.
ANS:
a.
i.
ii.
iii.
b.
i.
ii.
iii.
8.
Spot
$1.345
1.330
5/1 Forward
$1.348
1.330
Required
Make the journal entries to record the following transactions, including appropriate
adjusting entries:
a.
b.
ANS:
a.
Accounts receivable
1,345,000
Sales revenue
b.
Exchange loss
1,345,000
15,000
Accounts receivable
Investment in forward
15,000
18,000
Exchange gain
Foreign currency
18,000
1,330,000
Accounts receivable
Cash
1,348,000
Investment in forward
Foreign currency
1,330,000
18,000
1,330,000
9.
February 1, 2010
May 1, 2010
July 1, 2010
7/1 forward
rate
$1.350
1.344
1.330
Spot rate
$1.345
1.340
1.330
Required
a.
Make the journal entries to record the following transactions, including
appropriate adjusting entries:
i.
May 1 delivery of merchandise.
ii.
July 1 closing of forward contract and payment of bill.
b.
Assume the U.S. company sells the merchandise to a U.S. customer for
$1,600,000. What is the reported gross margin (sales revenue minus cost of goods
sold) on the sale?
ANS:
a.
i.
Exchange loss
6,000
Investment in forward
Firm commitment
6,000
6,000
Exchange gain
Inventory
1,346,000
Firm commitment
Accounts payable
6,000
6,000
1,340,000
ii.
Exchange loss
14,000
Investment in forward
Accounts payable
14,000
10,000
Exchange gain
10,000
Foreign currency
Investment in forward
1,330,000
20,000
Cash
1,350,000
Accounts payable
1,330,000
Foreign currency
b.
10.
1,330,000
November 8, 2012
December 31, 2012
March 8, 2013
April 10, 2013
Spot rate
1.25
1.27
1.24
1.23
Required
a.
Prepare the adjusting entry necessary to update the investment in forward at
December 31, 2012.
b.
Prepare the entries necessary to take delivery of the merchandise and close the
forward on March 8, 2013.
c.
Prepare the entry necessary to record cost of goods sold on April 10, 2013.
ANS:
a.
Investment in forward
2,000
Other comprehensive income
b.
Other comprehensive income
2,000
4,000
Investment in forward
Foreign currency
Investment in forward
4,000
124,000
2,000
Cash
126,000
Inventory
124,000
Foreign currency
124,000
c.
Cost of goods sold
126,000
Inventory
Other comprehensive income
124,000
2,000
11.
Forward and spot rates for yen and shekels are as follows:
Forward rate
Spot rate
for 1/15/12
for yen
delivery of yen
$ .0086
$ .0088
.0084
.0085
Forward rate
Spot rate
for 2/15/12
for new
delivery of new
shekels
shekels
$.220
$ .221
.222
.219
b.
Investment in forward
30,000
Other comprehensive income
c.
Exchange loss
2,000
Investment in forward
30,000
2,000
12.
Spot Rate
$1.22
1.21
1.19
Required
Answer the following questions regarding how the above information is reported on the
companys financial statements:
a.
b.
ANS:
a.
b.
Inventory
$100,000 loss
50,000 gain
100,000 gain
$ 50,000 gain
6,100,000
Firm commitment
Accounts payable
50,000
6,050,000
$8,000,000
6,100,000
$1,900,000
13.
Topic: Forward purchase, cash flow hedge that becomes a fair value hedge
LO 4, 5, 6
A U.S. company purchases merchandise from a Hong Kong supplier on a regular basis.
The following events occur:
October 1, 2012
December 1, 2012
December 31, 2012
March 1, 2013
May 1, 2013
Spot rate
$0.125
0.127
0.128
0.131
0.132
Required
Prepare the journal entries to record the above transactions, including necessary adjusting
entries. Assume the hedge qualifies for special hedge accounting.
ANS:
Adjusting entries at December 31, 2012:
Investment in forward
Other comprehensive income
To record increase in value of forward contract ($.127 to $.131)
Exchange loss
4,000
4,000
2,000
Firm commitment
To record loss on firm commitment ($.129 to $.131)
2,000
2,000
Exchange gain
2,000
To reclassify other comprehensive income to income to match against loss on firm
commitment.
March 1, 2013
Investment in forward
500
500
Exchange loss
500
Firm commitment
To mark the firm commitment to market ($.131 to $.1315)
500
500
Exchange gain
500
To reclassify other comprehensive income to income to match against firm commitment
loss.
Inventory
Firm commitment
128,500
2,500
Accounts payable
To record delivery of merchandise, adjusted for firm commitment balance.
131,000
May 1, 2013
Investment in forward
500
500
1,000
Accounts payable
To mark accounts payable to market ($.131 to $.132)
1,000
1,000
Exchange gain
1,000
To reclassify other comprehensive income to income to match against accounts payable
loss.
Foreign currency
132,000
Investment in forward
Cash
5,000
127,000
132,000
Foreign currency
132,000
127,000
1,500
Inventory
128,500
Note: Remaining other comprehensive income balance is $4,000 - $2,000 + $500 - $500 +
$500 - $1,000 = $1,500 gain.
14.
Spot rate
$1.45
1.50
1.52
1.56
1.60
On October 1, 2011, a U.S. company forecasts that it will buy merchandise from a
supplier in Portugal for 10,000,000 around the end of March, 2012, with payment
expected to be made, in euros, about one month later. The company closes its books on
December 31. The following events occur:
1.
2.
3.
4.
5.
6.
October 1, 2011: The company enters a forward purchase agreement for delivery
of 10,000,000 on April 30, 2012. No initial investment is required.
December 31, 2011: The company closes its books.
January 31, 2012: The company issues a purchase order to the supplier for
10,000,000 in merchandise, to be delivered March 31, 2012.
March 31, 2012: The company takes delivery of the merchandise.
April 30, 2012: The company closes the forward contract and pays the supplier
10,000,000.
May 15, 2012: The company sells the merchandise to a U.S. customer for
$22,500,000.
Required
Fill in the schedule below, showing the amounts related to the above events that will be
reported in the companys annual reports for 2011 and 2012. Show related journal entries
in the next schedule. Show liabilities and gains in parenthesis.
ANS:
Account title
Investment in forward
(balance sheet)
Other comprehensive
income (Balance sheet)
2012
$ 500,000
(500,000)
2011
2012
--
$ 500,000
--
--
--
--
--
--
--
$14,800,000
(500,000)
--
$ (200,000)
(300,000)
(200,000)
400,000
$ (300,000)
$15,600,000
200,000
200,000
March 31
Investment in forward 300,000
OCI
300,000
Exchange loss
300,000
Firm commitment
300,000
OCI
300,000
Gain
300,000
Inventory
15,300,000
Firm commitment
300,000
A/P
15,600,000
April 30
Investment in forward
200,000
OCI
200,000
Exchange loss
400,000
A/P
400,000
OCI
400,000
Exchange gain
400,000
Foreign currency
16,000,000
Cash
14,800,000
Investment in for.
1,200,000
A/P
16,000,000
Foreign currency
16,000,000
May 15
CGS
OCI
Inventory
14,800,000
500,000
500,000
Investment in forward
Exchange gain
200,000
Investment in forward
Exchange gain
--
300,000
500,000
200,000
300,000
-Inventory
A/P
15,600,000
15,600,000
Investment in forward
Exchange gain
200,000
Exchange loss
A/P
400,000
--
200,000
400,000
Foreign currency
Cash
14,800,000
Investment in for.
A/P
Foreign currency
16,000,000
CGS
Inventory
15,600,000
15,600,000
1,200,000
16,000,000
16,000,000
15,300,000
15.
Spot rate
$ 0.80
0.84
0.82
A U.S. company enters a forward contract on October 31, 2011 to hedge a forecasted
purchase of merchandise for C$1,000,000 on March 31, 2012. On March 31 it takes
delivery of the merchandise, closes the forward and pays for the merchandise. It sells the
merchandise in May. The companys accounting year ends December 31.
Required
What are the balances for the following accounts, assuming the forward contract qualifies
as a hedge of the forecasted transaction for the period October 31, 2011 to March 31,
2012, and also if the forward contract does not qualify as a hedge?
a.
b.
c.
d.
ANS:
Qualifies as hedge
Other comprehensive income, December
31, 2011 (gain)
2011 income statement
gain on forward contract
2012 income statement
loss on forward contract
2012 cost of goods sold
$ 50,000
50,000
0
810,000
40,000
820,000
16.
12/1/11
$.00620
.00630
.00620
.00610
.00615
12/16/11 12/31/11
$.00610 $.00600
.00620
.00610
.00610
.00603
.00600
.00590
.00605
.00595
1/15/12
$.00593
.00600
.00590
.00580
.00585
3/1/12
$.00580
.00590
.00580
.00570
.00575
Required
a.
Calculate the gain or loss on Electronic Importers' 2011 income statement due to
the above items. Specify the amount and whether it is a gain or loss.
b.
Calculate the balances at which the forward purchase contract and the forward sale
contract would be reported in the December 31, 2011 balance sheet.
c.
At what amount (U.S. dollars) should the computer hardware be valued on March
1, 2012?
ANS:
a.
Forward purchase contract: no income effect due to offsetting gain and loss on
contract and firm commitment.
b.
$7,000 gain
1,500 gain
$8,500 gain
c.
($.0058 x 20,000,000) =
Plus firm commitment balance:
($.0063 - $.0058) x 20,000,000
Hardware balance, 3/1/12
$116,000
10,000
$126,000
17.
September 1, 2012
October 1, 2012
December 31, 2012
February 1, 2013
Spot rate
$.80
.78
.75
.69
Forward rate
for delivery on
2/1/13
$.82
.79
.74
.69
Required
For each situation, (1) make the journal entries necessary to record the events, including
year-end adjustments, and (2) calculate the effect on Acme's income in the year 2012, and
in the year 2013. Show the amounts and whether they are gains or losses.
a.
b.
c.
d.
e.
ANS:
1a.
10/1
Merchandise
3,900
Accounts payable
3,900
(5,000 x $.78)
12/31
10/1
Accounts payable
150
Exchange gain
150
Accounts payable
300
Exchange gain
300
Accounts payable
3,450
Cash
3,450
(5,000 x $.69)
b.
10/1
Merchandise
3,900
Accounts payable
12/31
3,900
Accounts payable
150
Exchange gain
12/31
150
Exchange loss
250
Investment in forward
250
Accounts payable
300
Exchange gain
2/1
300
Exchange loss
250
Investment in forward
250
Foreign currency
Investment in forward
3,450
500
Cash
2/1
Accounts payable
3,450
Foreign currency
3,950
3,450
c.
10/1
Exchange loss
150
Investment in forward
150
Firm commitment
150
Exchange gain
10/1
150
Merchandise
3,900
Accounts payable
10/1
Merchandise
3,900
150
Firm commitment
12/31
Exchange loss
150
250
Investment in forward
12/31
Accounts payable
250
150
Exchange gain
2/1
150
Exchange loss
250
Investment in forward
Accounts payable
250
300
2/1
Exchange gain
2/1
2/1
300
Foreign currency
3,450
Investment in forward
500
Cash
3,950
Accounts payable
3,450
2/1
Foreign currency
3,450
d.
12/31
Investment in forward
250
Exchange gain
250
Investment in forward
250
Exchange gain
250
Foreign currency
3,450
Cash
3,450
Cash
3,950
2/1
Foreign currency
Investment in forward
e.
10/1
Investment in forward
3,450
500
100
Other comprehensive
income
100
[($.78-.76) x 5,000]
10/1
Foreign currency
3,900
Investment in forward
Cash
Merchandise
100
3,800
3,900
10/1
Foreign currency
2.
(a)
(b)
(c)
(d)
(e)
3,900
Income effects:
2012
$150 gain
100 loss
100 loss
250 gain
-0-
2013
$300 gain
50 gain
50 gain
250 gain
-0-
18.
13,800,000
Cash
12/14
Temporary investments
13,800,000
200,000
Exchange gain
$200,000 = ($1.40 - $1.38) x 10,000,000.
Foreign currency
Temporary
investments
Interest income
$186,667 = (10,000,000 x 8% x 2/12) x $1.40
200,000
14,186,667
14,000,000
186,667
19.
November 1, 2013
December 31, 2013
February 1, 2014
March 15, 2014
Spot rate
$ 1.42
1.46
1.47
1.50
Required
a.
Does the company enter a forward purchase or a forward sale contract? Explain.
b.
Prepare the journal entries necessary on December 31, 2013 and February 1, 2014
to record the above events.
ANS:
a.
A forward sale locks in the selling price. If the rate falls, as the company expects,
it will gain by buying euros at the lower price and selling at the higher contract
price.
b.
December 31, 2013
Loss
20,000
Investment in forward
To adjust the forward contract to fair value; $20,000 = ($1.45 - $1.43) x
1,000,000.
20,000
February 1, 2014
Loss
30,000
Investment in forward
To adjust the forward contract to fair value; $30,000 = ($1.48 - $1.45) x
1,000,000.
30,000
The company closes the forward by entering a forward purchase for delivery on March 15,
2014, at $1.48/. So the company sells at $1.43 and buys at $1.48, for a net cash outflow
of ($1.48 - $1.43) x 1,000,000 = $50,000.
Investment in forward
Cash
To close the forward contract on February 1, 2014.
50,000
50,000
20.
Spot rate
0.80
0.74
0.72
The company follows IFRS and uses the basis adjustment approach to reporting cash flow
hedges.
Required
Prepare the journal entries to record the following events:
a.
b.
c.
d.
ANS:
a.
June 30, 2011
Other comprehensive income
50,000
Investment in forward
50,000
To adjust the forward contract to fair value; 50,000 = (.81 - .76) x $1,000,000.
b.
August 1, 2011
Other comprehensive income
40,000
Investment in forward
40,000
To adjust the forward contract to fair value; 40,000 = (.76 - .72) x $1,000,000.
Foreign currency
Investment in forward
720,000
90,000
Cash
810,000
720,000
Foreign currency
720,000
90,000
90,000
c.
June 30, 2012
Depreciation expense
371,250
Equipment, net
371,250
To record depreciation expense for fiscal 2012; 371,250 = (810,000/2) x 11/12.
d.
June 30, 2012
Depreciation expense
330,000
Equipment, net
330,000
To record depreciation expense for fiscal 2012; 330,000 = (720,000/2) x 11/12.
Depreciation expense
41,250