Week One Assignment

ACC 40165 Advanced Accounting II

Emily Piper
May 8, 2016
Case 11-1 Effects of Changing Exchange Rates
a) The main factors that influence the demand for and supply of the U.S. dollar
on the foreign exchange markets are: the rate of inflation, the balance of
payments, alternative investment opportunities, and interest rates. Each
factor affects the supply and demand differently. For example, an increase in
inflation will devaluate the U.S. dollar and decrease interest rates. This will in
turn make alternative investments in other countries more attractive to
investors.
b) 1) A drop in the value of the U.S. dollar will affect the sale of exports U.S.
business firms by making the exports less expensive for foreign companies.
As a result, the foreign demand for the product sold by U.S. businesses will
increase due to the price reduction.
2) If the U.S. firm uses imports from other countries and the value of the U.S.
dollar drops, the opposite effect is true. The foreign goods then cost more
U.S. dollars to purchase making them more expensive for the U.S.
businesses. An increase in costs will negatively impact the businesses in the
U.S. that import the goods.
c) Consumers and business firms are highly affected by a drop in the value of
the U.S. dollar in relation to other currencies on foreign exchange markets.
As illustrated above, the costs are increased for the U.S. businesses. To
compensate for these costs, the businesses will pass the higher costs onto
the consumers. In conclusion, all goods with foreign elements have the
chance of affecting prices for both the consumers and business owners.

Problem 11-22 Foreign Currency Transactions

1. January 15
Accounts Receivable
Sales Revenue

March 15

7,400
7,400

Cash

7,400
Accounts Receivable

7,400

2. March 8
Inventory (or Purchases)
11,760
Accounts Payable
11,760
Foreign inventory purchase: IR7,000 x $1.68 = $11,760
May 1
Accounts Payable
11,620
Foreign Currency Units
11,620
Foreign currency payable: IR7,000 x $1.66 = $11,620

Accounts Payable
Foreign Currency Transaction Gain
$11,760 - $11,620 = $140

140
140

3. May 12
Foreign Currency Receivable from
Exchange broker (NT$)
Dollars Payable to Exchange Broker ($)

3,008
3,008

August 1
Foreign Currency Receivable from
Exchange Broker (NT$)
Foreign Currency Transaction Gain
$3,024 3,008 = $16
Foreign Currency Transaction Loss
Firm Commitment
Inventory (or Purchases)
Firm Commitment
Accounts Payable
80,000 x 0.0375 = $3,000

16
16
16
16

2,984
16
3,000

September 9
Foreign Currency Transaction Loss
Foreign Currency Receivable
from Exchange Broker
$3,024 2,976 = $48

48

Accounts Payable (NT$)

Foreign currency transaction gain
$80,000 x (0.0372 0.0375) = $24

24

Dollars Payable to Exchange Broker ($)

Cash

3,008

48

24

3,008

Foreign Currency Units (NT$)

2,976
Foreign Currency Receivable
from Exchange Broker
2,976
0.0372 x 80,000 = $2,976
Accounts Payable
Foreign Currency Units

2,976
2,976

4. June 6
Accounts Receivable
Sales Revenues
150,000 x 0.600 = $90,000

90,000
90,000

July 6
Dollars Receivable from
Exchange broker ($)
87,000
Foreign Currency Payable
to Exchange broker ()
60-day forward contract signed to deliver euros:
150,000 x 0.580 = $87,000

87,000

September 4
Foreign Currency Transaction Loss
2,250
Accounts Receivable ()
90,000 87,750 = 2,250 (150,000 x (0.585 0.580))

2,250

Foreign Currency Units

87,750
Accounts Receivable
87,750
Receive euros from customer: 150,000 x 0.585 = 87,750
Foreign Currency Transaction Loss
Foreign Currency Payable to
Exchange broker
$87,750 87,000 = 750
Foreign Currency Payable to
Exchange broker
Foreign Currency Units

750
750

87,750
87,750

Cash
87,000
Dollars receivable from
87,000
Exchange broker
Receive dollars from broker from contract signed previously:
150,000 x 0.580 = $87,000
Problem 11-25 Understanding Foreign Currency Transactions
a) Indirect exchange rate for Australian dollars:
Dec. 1, 20X5: A$70,000 $42,000 = 1.667
Dec. 31, 20X5: A$70,000 $41,700 = 1.679
b) The balance in the account, Foreign Currency Payable to Exchange Broker in the
adjusted trial balance was $39,900 on Dec. 31, 20X5.
A$70,000 x $0.57 (forward rate) = $39,900
c) Upon entering the 60-day forward contract, the direct exchange rate was A$1 =
$0.58.
40,600 70,000 = $0.58
d) The amount of Dollars Receivable from Exchange Broker in the adjusted trial
balance is $40,600.
e) Indirect exchange rate for South Korean wons:
Oct. 2: KRW400,000 $80,000 = $1 equals KRW5
Dec. 31: KRW400,000 $80,800 = $1 equals KRW4.950

f) The balance of Dollars Payable to Exchange Broker is $82,000 in both the

adjusted and unadjusted trial balance.
g) Upon entering the 120-day forward contract, the direct exchange rate was:
$82,000 KRW400,000 = $0.205.
h) Accounts payable balance on Dec. 31, 20X5:
KRW400,000 x $0.2020 = $80,800

Problem 11-31 Determining Financial Statement Amounts

Computations:
Forward contract receivable 20,000 x $1.01 (12/31 forward rate) = $20,200
Inventory $21,000 A/P - $1,200 firm commitment = $19,800
20,000 x $1.05 (11/30 spot rate) = $21,000
Accounts Payable 20,000 x $0.98 (12/31 spot rate) = $19,600
Foreign Currency Exchange Gain or Loss, net:
Transaction 1:
$1,200 exchange gain on forward contract
-1,200 exchange loss on firm commitment
-400 exchange loss on forward contract
+1,400 exchange gain on account payable
= $1,000
Transaction 2:
There is no net foreign currency exchange gain because there is an offset of the gain from other
comprehensive income. This offset is an equal amount from the revaluation of the account
payable.
Other Comprehensive Income (gain or loss), net
$800 OCI gain on forward contract
+1,400 OCI gain on the reclassification from OCI
= $2,200
Transaction 3:
$1,400 exchange gain on account payable

-400 exchange loss on forward contract

= $1,000
Transaction 4:
$800 = exchange gain on forward contract
Continued

1
Forward
contract
receivable
Inventory
Accounts
Payable
Foreign
Currency
Exchange (gain
or loss) net
Other
comprehensive
income (gain or
loss) net

Transaction
3

20,200

20,200

20,200

20,200

19,800

21,000

21,000

N/A

19,600

19,600

19,600

N/A

1,000 (Gain)

N/A

1,000 (Gain)

800 (Gain)

N/A

2,200 (Gain)

N/A

N/A