Foreign Currency Concepts and TransactionsChapter 12

PRIVATE

Chapter 12

FOREIGN CURRENCY CONCEPTS AND TRANSACTIONS

Answers to Questions1 A transaction is measured in a particular currency if its magnitude is expressed in that currency. Assets and liabilities are denominated in a currency if their amounts are fixed in terms of that currency.

2 A Canadian dollar is a foreign currency from the viewpoint of a U.S. corporation and from the viewpoint of a Canadian entity whose functional currency is not the Canadian dollar. This is because a foreign currency is any currency other than the functional currency of the entity being referred to.

3 Direct quotation: .72/1 = $.72

Indirect quotation: 1/.72 = 1.3889 Canadian dollars

4 Official or fixed rates are set by a government and do not change as a result of changes in world currency markets. Free or floating exchange rates are those that reflect fluctuating market prices for currency based on supply and demand factors in world currency markets. The United States changed from fixed to floating (free) exchange rates in 1971. But the U.S. dollar is sometimes described as a "filthy float" because the United States has frequently engaged in currency transactions to support or weaken the dollar against other currencies. Such action is taken for economic reasons, such as to make U.S. goods more competitive in world markets. Both Japan and Germany have engaged in currency transactions in an attempt to support the U.S. dollar. In February 1987, the United States and six other industrial nations (the Group of 7 or G-7) entered the Louvre accord to cooperate on economic and monetary policies in support of agreed upon exchange rate levels.

5 Spot rates are the exchange rates for immediate delivery of currencies exchanged. The current rate for foreign currency transactions is the spot rate in effect for immediate settlement of the amounts denominated in foreign currency at the balance sheet date. Historical rates are the rates that were in effect on the date that a particular event or transaction occurred.

6 The transaction is a foreign transaction because it involves import activities, but it is not a foreign currency transaction for the U.S. firm because it is denominated in local currency. It is a foreign currency transaction for the Japanese company.

7 At the transaction date, assets and liabilities denominated in foreign currency are translated into dollars by use of the exchange rate in effect at that date, and they are recorded at that amount.

At the balance sheet date, cash and amounts owed by or to the enterprise that are denominated in foreign currency are adjusted to reflect the current rate. Assets carried at market whose current market price is stated in a foreign currency are adjusted to the equivalent dollar market price at the balance sheet date.

8 Exchange gains and losses occur because of changes in the exchange rates between the transaction date and the date of settlement. Both exchange gains and exchange losses can occur in either foreign import activities or foreign export activities. The statement is erroneous.

9 Exchange gains and losses on foreign currency transactions are reflected in income in the period in which the exchange rate changes except for hedges of an identifiable foreign currency commitment where deferral is possible if certain requirements are met. Also hedges of a net investment in a foreign entity are treated as equity adjustments from translation. Intercompany foreign currency transactions of a long-term nature are also treated as equity adjustments.

10 There will be a $20 exchange loss in the period of purchase and a $10 exchange gain in the period of settlement:

Billing date

Purchases

$1,450

Accounts payable (fc)

$1,450

Year-end adjustment

Exchange loss

$ 20

Accounts payable (fc)

$ 20

Settlement date

Accounts payable (fc)

$1,470

Cash

$1,460

Exchange gain

1011 A forward exchange contract (or futures contract) is an agreement to exchange at a specified future date, currencies of different countries at a specified rate (the forward rate). Futures contracts (derivative instruments) are used to speculate in foreign currency exchange price movements, to hedge an exposed foreign currency net asset or net liability position, to hedge an anticipated or actual foreign currency commitment, or to hedge a net investment in a foreign entity.

12 The purpose of the derivative contract is to mitigate or eliminate potential foreign exchange gains or losses. The derivative contract is carried at the forward rate (fair value) while the underlying liability is carried at the spot rate. If these two rates do not move exactly in tandem a recognized gain or loss would be the result.

13 A hedge against an identifiable foreign currency commitment fixes the price of the commitment at the future rate. Any gains or losses on the hedge are exactly offset by changes in the value of the underlying firm commitment. No gain or loss would need to be recognized.

SOLUTIONS TO EXERCISESSolution E12-11b

2d

3d

4b

Solution E12-21The dollar weakened against the yen.

210,000,000 yen x $.0075 = $75,000

3Accounts payable

$75,000

Exchange loss

1,000

Cash

$76,000

4Zimmer would have entered a contract to purchase yen for future receipt.

Solution E12-3December 16, 2003

Purchases

$18,900

Accounts payable (euros)

$18,900

To record purchase of merchandise from Hughes Corporation for 30,000 euros at $.63 spot rate.

December 31, 2003

Exchange loss

$ 900

Accounts payable (euros)

$ 900

To adjust accounts payable to Hughes: ($.66 - $.63) x 30,000 euros.

January 15, 2004

Accounts payable (euros)

$19,800

Exchange gain

$ 600

Cash

19,200

To record payment of 30,000 euros at $.64 spot rate in settlement of account payable and to recognize gain.

Solution E12-4Adjustment in value of account receivable for 2005:

($.72 - $.70) x 40,000 C$ = $800 exchange gain

Adjustment in value of account receivable at settlement in 2006:

($.71 - $.72) x 40,000 C$ = $400 exchange loss

Solution E12-5May 1, 2003

Accounts receivable (fc)

$200,000

Sales

$200,000

To record sale of inventory items to Royal for 120,000 pounds: 120,000 pounds/.6000 pounds (indirect quotation).

May 30, 2003

Cash (fc)

$198,347

Exchange loss

1,653

Accounts receivable (fc)

$200,000

To record receipt of 120,000 pounds from Royal in settlement of accounts receivable: 120,000 pounds/.6050 pounds.

Solution E12-6 [AICPA adapted]

1cOn December 31, 2007 Bain received payment of 300,000 LCU with a market value of $105,000 in payment of an account receivable recorded at $100,000, for a foreign exchange gain of $5,000.

2dOn December 31, 2004 Yumi Corp. adjusts its account payable denominated in a foreign currency from $5,500 to $7,000 (10,000 x $.70) and recognizes a loss of $1,500 [10,000 LCU x ($.70 - $.55)]

3dDecember 31, 2004 note payable

$240,000

July 1, 2005 note payable

280,000

2005 exchange loss

$(40,000)

4dNote receivable December 31, 2003

$140,000

Amount collected July 1, 2004

(840,000 LCU 8)

105,000

2004 exchange loss

$ 35,000Solution E12-71. Exchange gain or loss in 2003:

Gain or (Loss)

Account receivable December 16$103,500

December 31 adjusted balance

150,000 C$ x $0.68

102,000

$(1,500)

Account payable December 2

$195,250

December 31 adjusted balance

275,000 C$ x $0.68

187,000

8,250Net exchange gain for 2003

$6,7502. Exchange gain or loss in 2004:

Account receivable adjusted 12/31$102,000

Account receivable 1/16/04

101,250

$ (750)

Account payable adjusted 12/31$187,000

Account payable 1/30/04

188,375

(1,375)

Net exchange loss for 2004

$(2,125)Solution E12-81December 12, 2003

Purchases

$375,000

Accounts payable (yen)

$375,000

Purchase from Toko Company (50,000,000 yen x $.00750).

December 15, 2003

Accounts receivable (pounds)

$ 66,000

Sales

$ 66,000

Sale to British Products Company (40,000 pounds x $1.652).

2December 31, 2003

Exchange loss

$ 5,000

Accounts payable (yen)

$ 5,000

To adjust accounts payable denominated in yen for exchange rate change: 50,000,000 yen x ($.00760 - $.00750).

Exchange loss

$ 2,000

Accounts receivable (pounds)

$ 2,000

To adjust accounts receivable denominated in pounds for exchange rate change: 40,000 pounds x ($1.65 - $1.60).

3January 11, 2004

Accounts payable (yen)

$380,000

Exchange loss

2,500

Cash

$382,500

To record payment to Toko Company (50,000,000 yen x $.00765).

January 14, 2004

Cash

$ 65,200

Accounts receivable (pounds)

$ 64,000

Exchange gain

1,200

To record receipt from British Products Company: 40,000 pounds x $1.63.

Solution E12-9March 1, 2008

Purchases

$16,300

Accounts payable (LCU)

$16,300

To record purchase of inventory items denominated in LCUs:

100,000 LCUs x $.1630.

Contract receivable (LCU)

$16,500

Contract payable

$16,500

To record purchase of 100,000 LCUs for delivery in 90 days.

May 30, 2008

Cash (LCU)

$16,000

Exchange loss

500

Contract receivable (LCU)

$16,500

To record receipt of 100,000 LCUs from the exchange broker when the exchange rate is $.1600. Exchange loss: 100,000 LCUs x ($.1650 - $.1600).

Contract payable

$16,500

Cash

$16,500

To record settlement of forward contract with the exchange broker.

Accounts payable (LCU)

$16,300

Cash (LCU)

$16,000

Exchange gain

300

To record payment to Cavilier of 100,000 LCUs. Gain: 100,000 LCUs x ($.1630 - $.1600).

Solution E12-101The exchange loss on the account payable denominated in LCU will offset the exchange gain on the contract receivable, also denominated in LCU, so that there will be no exchange gain or loss in 2008.

2The income effect in 2009 will be amortization of the premium on the forward contract: 10,000,000 LCU x ($.00057 - $.00055) = $200 premium

$200 premium x 30/60 days = $100 amortization

Supporting entries:

Purchase transaction December 1, 2008

Inventory

$5,500

Accounts payable (LCU)

$5,500

To record purchase of merchandise denominated in LCU:

(10,000,000 LCU x $.00055)

Hedge transaction December 1, 2008

Contract receivable (LCU)

$5,500

Premium on forward contract 200

Contract payable

5,700

To record forward contract to buy 10,000,000 LCU from the exchange broker at $.00057.

December 31, 2008 adjustments

Contract receivable (LCU)

$ 100

Exchange gain

$ 100

To record year-end adjustment of contract receivable ($.57 - $.56) x 10,000,000.

Exchange loss

$ 100

Accounts payable (LCU)

$ 100

To record year-end adjustment of account payable.

Amortization expense

$ 100

Premium on forward contract

$ 100

To record amortization of premium (30/60 days x $200).

January 30, 2009

Accounts payable (LCU)

$5,600

Cash

$5,500

Exchange gain

100

To record payment to Benetton of 10,000,000 LCU.

Cash

$5,500

Exchange loss

100

Contract receivable (LCU)

$5,600

To record receipt of 10,000,000 LCU from the exchange broker.

Contract payable

$5,700

Cash

$5,700

To record payment of cash to the exchange broker.

Amortization expense

$ 100

Premium on forward contract

$ 100

To record amortization of premium.

Solution E12-11 [AICPA adapted]

1dImp's contract with the exchange broker is for the purchase of LCUs. Therefore, the contract receivable is denominated in LCUs. Gain on the year-end adjustment is $10,000 [$100,000 x ($.98 current rate - $.88 historical rate)]

2aIn accounting for a hedge of a foreign currency commitment, the gain or loss is deferred and treated as an adjustment of the cost of the equipment.

3bThe speculation is valued at the forward rate throughout the life of the contract [100,000 LCU x ($.93 - $.90)].

Solution E12-12

(1)

(2)

Foreign

Balance Gain

Currency Exchange Sheet or

Units Rate Amounts (Loss) British pounds 50,000$1.67 $ 83,500 $(1,500)

Euros

200,000$0.60 120,000 10,000

Japanese yen10,000,000$0.0080 80,000 4,000

$283,500 $12,500 gain

Solution E12-13June 8, 2008

Purchases

$16,000

Accounts payable (pounds)

$16,000

To record purchase of merchandise denominated in pounds (10,000 pounds x $1.60)

July 7, 2008

Accounts payable (pounds)

$16,000

Exchange loss

100

Cash

$16,100

To record payment on account (10,000 pounds x $1.61).

October 1, 2008

Accounts receivable (euros)

$20,100

Sales

$20,100

To record sale denominated in euros (30,000 euros x $.67).

October 19, 2008

Cash

$19,950

Exchange loss

150

Accounts receivable (euros)

$20,100

To record receipt of 30,000 euros in settlement of account receivable. Cash: 30,000 euros x $.665.

November 16, 2008

Accounts receivable (krona)

$67,000

Sales

$67,000

To record sale of merchandise denominated in krona (500,000 krona x $.134).

Contract receivable

$66,900

Discount on forward contract

100

Contract payable (krona)

$67,000

To record forward contract to sell 500,000 krona in 60 days at a forward rate of $.1338.

December 31, 2008

Accounts receivable (krona)

$ 150

Exchange gain

$ 150

To revalue account receivable denominated in krona for exchange rate change: 500,000 krona x ($.1343 - $.134).

Exchange loss

$ 150

Contract payable (krona)

$ 150

To revalue liability to the exchange broker.

Amortization of discount

$ 75

Discount on forward contract

$ 75

To amortize discount: $100 x 45/60 days.

Solution E12-14April 1, 2009

Contract receivable

$35,250

Contract payable (fc)

$35,250

To record forward contract to sell 50,000 Canadian dollars to the exchange broker at the forward rate of .705 for delivery on May 31 for $35,250.

May 31, 2009

Cash (fc)

$36,250

Sales

$36,250

To record sale of fittings to Windsor for 50,000 Canadian dollars: ($.725 x 50,000 Canadian)

Contract payable (fc)

$35,250

Exchange loss on forward contract 1,000

Cash (fc)

$36,250

To record payment of the contract denominated in Canadian dollars to the exchange broker.

Cash

$35,250

Contract receivable

$35,250

To record receipt of the $35,250 from the exchange broker to settle the account receivable denominated in U.S. dollars.

Sales

$ 1,000

Exchange loss

$ 1,000

To reclassify exchange loss on forward contract as an adjustment of the selling price.

Solution E12-151Entry on November 2 for contract with the exchange broker:

Contract receivable (fc)

$7,800

Contract payable

$7,800

To record contract to purchase 1,000,000 yen in 90 days at the future rate.

2No journal entry needed as the 30day future rate at the end of the year is at $.0078 which was the same rate as the ninety day rate on November 2.

Solution E12-16October 2, 2003

Contract receivable

$653,000

Contract payable (fc)

$653,000

To record contract to sell 1,000,000 euros to exchange broker in 180 days for the forward rate of $.6530.

December 31, 2003

Contract payable (fc)

$ 12,000

Exchange gain

$ 12,000

To adjust contract payable in euros to the 90-day forward rate of $.6410.

March 31, 2004

Contract payable (fc)

$641,000

Exchange loss

14,000

Cash (fc)

$655,000

To record payment of 1,000,000 euros to exchange broker when spot rate is $.6550.

Cash

$653,000

Contract receivable

$653,000

To record receipt of U.S. dollars from exchange broker in settlement of account.

SOLUTIONS TO PROBLEMSSolution P12-11 and 2

Per

BalanceExchange Gain

BooksSheet or (Loss) Accounts receivableU.S. dollars

$28,500$28,500

Swedish Krona (20,000x$.66) 11,800 13,200

$ 1,400

British pounds(25,000x$1.65) 41,000 41,250

250

$81,300$82,950

1,650Accounts payableU.S. dollars

$ 6,850$ 6,850

Canadian dollars (10,000x$.70) 7,600 7,000

$ 600

British pounds (15,000x$1.65) 24,450 24,750

(300)

$38,900$38,600

300 Net exchange gain

$ 1,9503Collect receivables:

Cash

$28,500

Accounts receivable

$28,500

To record collection of accounts receivable.

Cash

$13,400

Accounts receivable (Krona)

$13,200

Exchange gain

200

To collect 20,000 Krona at $.67 spot rate.

Cash

$40,750

Exchange loss

500

Accounts receivable (pounds)

$41,250

To collect 25,000 pounds at $1.63 spot rate.

4Settlement of accounts payable:

Accounts payable

$ 6,850

Cash

$ 6,850

To record payment of accounts denominated in dollars.

Accounts payable (Canadian $)

$ 7,000

Exchange loss

100

Cash

$ 7,100

To record payment of account denominated in Canadian dollars.

Accounts payable (pounds)

$24,750

Cash

$24,300

Exchange gain

450

To record payment of 15,000 pounds at $1.62 spot rate.

Solution P12-21. Entries on April 1

Accounts receivable (LCU)

$33,060

Sales

$33,060

To record sales on account denominated in LCUs:

200,000 LCUs / 6.0496 LCUs

Contract receivable

$33,228

Discount on forward contract

168

Contract payable (LCU)

$33,060

To record forward contract for delivery in 60 days of

200,000 LCUs to the exchange broker:

200,000 LCUs / 6.019 LCUs

2. Entries on May 30

Cash (LCU)

$33,378

Accounts receivable (LCU)

$33,060

Exchange gain

318

To record collection of receivable in LCUs:

200,000 LCUs / 5.992 LCUs

Contract payable (LCU)

$33,060

Exchange loss

318

Cash

$33,378

To record delivery of 200,000 LCUs to the exchange broker.

Cash

$33,228

Contract receivable

$33,228

To record collection of amount due from exchange broker.

Discount on forward contract

$ 168

Amortization of discount

$ 168

To record amortization.

Solution P12-31 and 2Exchange Gain

Per BooksBalance Sheet or (Loss) Accounts receivableBritish pounds (100,000x1.660)$165,000 $166,000 $ 1,000

Euros (250,000x$.670)

165,000 167,500 2,500

Swedish krona (160,000x$.640) 105,600 102,400 (3,200)

Japanese yen (2,000,000x$.0076) 15,000 15,200 200

$450,600 $451,100 500Accounts payableCanadian dollars(150,000x$.69)$105,000 $103,500 $ 1,500

Swedish krona (220,000x$.135) 28,600 29,700 (1,100)

Japanese yen (4,500,000x$.0076) 33,300 34,200 (900)

$166,900 $167,400 ( 500)

Net exchange gain

$ 0Solution P12-4November 16, 2006

Contract receivable

$326,000

Contract payable (pounds)

$326,000

To record forward contract to sell 200,000 pounds for delivery on February 14, 2007 at a forward rate of $1.6300.

December 31, 2006

Loss on foreign exchange contract

$ 1,000

Contract payable (pounds)

$ 1,000

To adjust derivitive instrument to fair value at the end of the fiscal year. (1.635-1.630) x 200,000 pounds.

Change in value of firm commitment

$ 1,000

Gain on foreign exchange

$ 1,000

To record the change in value of the underlying firm

commitment being hedged.

February 14, 2007

Cash (pounds)

$666,000

Sales

$666,000

To record sale of equipment for 400,000 pounds when the spot rate for pounds is $1.6650.

Contract payable (pounds)

$327,000

Loss on foreign exchange contract

6,000

Cash (pounds)

$333,000

To record delivery of 200,000 pounds to the exchange broker in settlement of the contract payable. Loss: 200,000 pounds x ($1.6650 - $1.6350).

Change in value of firm commitment

$ 6,000

Gain on foreign exchange contract

$ 6,000

To record the change in value to the underlying firm

commitment being hedged.

Cash

$326,000

Contract receivable

$326,000

To record collection of the contract price.

Sales

$ 7,000

Change in value of firm commitment

$ 7,000

To adjust sales for the change in value of the firm commitment.

Solution P12-51Freeport Ltd. - January 15, 2006

Cash (fc)

$168,000

Accounts receivable (fc)

$167,000

Exchange gain

1,000

To record receipt of 100,000 in settlement of Freeport receivable: 100,000 x $1.68.

Contract payable (fc)

$167,000

Exchange loss

1,000

Cash (fc)

$168,000

To record delivery of 100,000 to the exchange broker in settlement of the contract payable denominated in .

Cash

$164,000

Contract receivable

$164,000

To record receipt of U.S. dollars from exchange broker in settlement of the contract receivable.

Amortization of discount

$ 500

Discount on forward contract

$ 500

To record amortization of remaining discount from hedge ($1,000 x 15/30 days).

2Matsushita purchase - March 1, 2006

Contract payable

$76,000

Cash

$76,000

To record payment to exchange broker of contract payable denominated in U.S. dollars.

Cash (fc)

$75,000

Exchange loss

500

Contract receivable (fc)

$75,500

To record collection from exchange broker of receivable denominated in yen (10,000,000 yen x $.00750 spot rate).

Account payable (fc)

$75,500

Cash (fc)

$75,000

Exchange gain

500

To record payment to Matsushita of 10,000,000 yen in settlement of account payable denominated in yen.

Amortization of premium

$ 400

Premium on forward contract

$ 400

To amortize remaining premium ($600 x 60/90 days).

Solution P12-61Entry on October 2, 2003

Contract receivable (euros)

$31,750

Contract payable

$31,750

To record forward contract to purchase 50,000 euros at $.6350 as a hedge of a firm commitment.

2December 31, 2003 adjustment

Contract receivable (euros)

$ 350

Exchange gain

$ 350

To adjust the contract receivable for 50,000 euros to the $.6420 future exchange rate at December 31, 2003: 50,000 euros x ($.6420 - $.6350).

Exchange loss

$ 350

Change in value of firm commitment

$ 350

To record the change in the value of the underlying

firm commitment hedged.

3Entries on March 31, 2004

Contract payable

$31,750

Cash

$31,750

To pay exchange broker for 50,000 euros at the forward rate of $.6350 established on October 2, 2003.

Cash (euros)

$32,800

Contract receivable (euros)

$32,100

Exchange gain

700

To record receipt of 50,000 euros from exchange broker when spot rate is $.6560.

Exchange Loss

$ 700

Change in value of firm commitment $ 700

To record the change in the value of the underlying

firm commitment hedged.

Purchases

$32,800

Cash (euros)

$32,800

To record purchase and payment in euros at $.6560 spot rate.

Change in value of firm commitment

$ 1,050

Purchases

1,050

To record the adjustment of purchases for the change in the value of the firm commitment. This effectively fixes the purchase at the original forward rate.

Solution P12-7December 2, 2003

Contract receivable

$840,000

Contract Payable

$840,000

To record forward contract for future delivery of 500,000

pounds to the exchange broker for $840,000

December 31, 2003

Other comprehensive income: exchange loss $10,000

Contract payable (fc)

$ 10,000

To adjust liability at year-end for change in the

exchange rate.

March 1, 2004

Cash (fc)

$860,000

Sales

$860,000

To record delivery of equipment to Ramsay Ltd. and

collection of 500,000 pounds at the $1.72 spot rate.

Contract payable (fc)

$850,000

Other comprehensive income: exchange loss 10,000

Cash (fc)

$860,000

To record delivery of the 500,000 pounds to the

exchange broker to settle the contract payable.

Cash

$840,000

Contract receivable

$840,000

To record collection of receivable from exchange broker

denominated in U.S. dollars.

Sales

$ 20,000

Other comprehensive income: exchange loss $20,000

To adjust sales account for exchange loss and discount

on forward contract.

Solution P12-81December 16, 2004

Equipment

$668,000

Accounts payable (fc)

$668,000

To record purchase of equipment (400,000 pounds x $1.67).

Contract receivable (fc)

$668,000

Premium on forward contract

4,000

Contract payable

$672,000

To record hedge of an exposed net liability position.

Payable: 400,000 pounds x $1.68 forward rate

2December 31, 2004

Accounts payable (fc)

$ 8,000

Exchange gain

$ 8,000

To adjust accounts payable for currency exchange rate change: 400,000 pounds x ($1.67 - $1.65).

Exchange loss

$ 8,000

Contract receivable (fc)

$ 8,000

To adjust contract receivable denominated in pounds for current exchange rate.

Amortization of premium

$ 2,000

Premium on forward contract

$ 2,000

To record amortization ($4,000 x 15/30 days).

3January 15, 2005

Cash (fc)

$656,000

Exchange loss

4,000

Contract receivable (fc)

$660,000

To record collection of pounds from exchange broker:

400,000 pounds x ($1.65 - $1.64) = $4,000 loss.

Contract payable

$672,000

Cash

$672,000

To record payment to exchange broker in dollars.

Accounts payable (fc)

$660,000

Cash (fc)

$656,000

Exchange gain

4,000

To record payment of accounts payable in pounds.

Amortization of premium

$ 2,000

Premium on forward contract

$ 2,000

To record amortization of premium ($4,000 x 15/30 days).

Solution P12-91November 2, 2007

Accounts receivable (fc)

$165,000

Sales

$165,000

To record sale of hospital equipment to Salem Ltd. for 100,000 .

Contract receivable

$163,800

Discount on forward contract

1,200

Contract payable (fc)

$165,000

To record contract to deliver 100,000 to the exchange broker in 90 days.

2December 31, 2007

Accounts receivable (fc)

$ 1,000

Exchange gain

$ 1,000

To adjust account receivable denominated in to $1.660 exchange rate and recognize gain: ($1.660 - $1.650) x 100,000 .

Exchange loss

$ 1,000

Contracts payable (fc)

$ 1,000

To adjust contract payable denominated in to the $1.660 year-end exchange rate and recognize loss.

Amortization of discount

$ 800

Discount on forward contract

$ 800

To record amortization of discount: $1,200 x 2/3 =$800.

3January 30, 2008

Cash (fc)

$166,500

Accounts receivable (fc)

$166,000

Exchange gain

500

To record receipt of 100,000 from Salem Ltd. in settlement of account receivable.

Contract payable (fc)

$166,000

Exchange loss

500

Cash (fc)

$166,500

To record delivery of 100,000 to exchange broker in settlement of a contract payable denominated in .

Cash

$163,800

Contract receivable

$163,800

To record collection from exchange broker.

Amortization of discount

$ 400

Discount on forward contract

$ 400

To record amortization of discount: $1,200 x 1/3 =$400.

Solution P12-101Schedule of forward contract items at December 31, 2003

Balance Sheet

Amount Current assetsContract receivable [Bennett hedge: in U.S. dollars] $168,000

Contract receivable [Toyaki hedge: 10,000,000 x $.0077] 77,000

Contract receivable [Speculation in euros: 200,000 x $.670

60-day forward exchange rate]

134,000

Change in value of firm commitment

1,000

Deferred chargesPremium on forward contract-Toyaki [$1,000 x 60/120 days] $ 500

Current liabilitiesAccounts payable [Toyaki account: 10,000,000 x $.0077] $ 77,000

Contract payable [Bennett hedge: 100,000 pounds x $1.690] 169,000

Contract payable [Speculation in euros: payable denominated

in U.S. dollars]

130,000

2Exchange gain or loss for 2003

Toyaki: $2,000 loss on account payable offset by $2,000

gain on contract receivable

$ 0

Bennett: Exchange loss is offset by the change in the

Value of the firm commmitment

0

Speculation: The speculation is accounted for at the forward

rate throughout the life of the contract. Therefore, the

contract receivable is adjusted to $134,000 (the rate for

60-day futures at December 31 and the $4,000 gain is

recognized)

4,000Exchange gain for 2003 appearing in income statement $ 4,000Solution P12-11

Grandview International

Adjusted Forward Contract Accounts

at December 31, 2008

Current assets:Accounts receivable [Notor: 100,000 Krona x $.23]$ 23,000

Contract receivable [Notor hedge: in U.S. dollars] 21,000 Contract receivable [Cheil hedge: 10,000,000 won x$.0014]14,000

Contract receivable [Sterling hedge: 10,000 Canadian

dollars x $.81]

8,100

$ 66,100Deferred charges:Discount on forward contract-Notor [$1,000 x 30/60 days] $ 500

Premium on forward contract-Cheil [$1,000 x 60/120 days] 500

Change in value of firm commitment

200

$ 1,200Current liabilities:Accounts payable [Cheil: 10,000,000 won x $.0014]

$ 14,000

Contract payable [Notor: 100,000 Krona x $.23]

23,000

Contract payable [Cheil hedge: in U.S. dollars]

13,000

Contract payable [Sterling hedge: in U.S. dollars] 8,400

$ 58,4001$21,000 [The contract receivable is denominated in U.S. dollars.]

2$14,000 and $14,000 [The contract receivable and account payable are both denominated in South Korean won and therefore they will be adjusted to the current exchange rate for won at December 31.]

3The contract receivable for the Sterling hedge is denominated in Canadian dollars and is therefore adjusted to fair value at year-end at the forward (30 dayto end of contract) exchange rate of $.82. An increase in the value of the firm commitment underlying this hedge must also be recorded. This gain would offset the loss on the contract.