Exercise AdvanceAcctgII

1) Johnson Corporation (a U.S. company) began operations on December 1, 2010, when the owner contributed $100,000 of his own money to establish the business. Johnson then had the following import and export transactions with unaffiliated Mexican companies:

December 12, 2011 Bought inventory for 150,000 pesos on account.Invoice denominated in pesos.

December 15, 2011 Sold 60% of inventory acquired on 12/12/11 for 120,000 pesos on account. Invoice denominated in pesos.

January 1, 2012 Acquired and paid the 150,000 pesos owed to the Mexican supplier

January 15, 2012 Collected the 120,000 pesos from the Mexican customer and immediately converted them into U.S. dollars

The following exchange rates apply:Date RateDecember 12 $.11 = 1 pesoDecember 15 $.12 = 1 pesoDecember 31 $.13 = 1 pesoJanuary 1 $.14 = 1 pesoJanuary 15 $.15 = 1 peso

Required:1. What were Sales in the income statement for the year ended December 31, 2011?2. What was the COGS associated with these sales?3. What is the Accounts Payable balance in the balance sheet at December 31, 2011?4. What is the Inventory balance in the balance sheet at December 31, 2011?

Answer: 1. Sales = December 15 sale of 120,000 pesos at $.12 / peso = $14,4002. COGS = 60% of inventory balance purchased 12/12/11 = 150,000 pesos ×$.11 = $16,500 × 60% = $9,9003. Accounts Payable balance = 150,000 pesos × $.13 = $19,5004. Inventory balance = 150,000 pesos x $.11 = $16,500 × 40% remaining after sale = $6,600Objective: LO5Difficulty: Difficult

2) Black Corporation (a U.S. company) began operations on January 1, 2011, when common stock was issued for $2,500,000. In the first two months of operations, Black had the following transactions:

January 15, 2011 Bought inventory for 1000,000 Mexican pesos on account

January 26, 2011 Sold 70% of inventory acquired on 1/15/11 for 440,000 Saudi riyals on account

January 27, 2011 Paid $10,000 in other operating expenses

February 2, 2011 Sold additional inventory that cost $10,000 for $30,000 cash to a U.S. company.

February 15, 2011Acquired and paid the 1,000,000 pesos owed to the Mexican supplier

February 21, 2011Paid $15,000 in other operating expenses

February 28, 2011Collected the 440,000 riyals from the Saudi customer and immediately converted them into U.S. dollars

The following exchange rates apply:Date Rate RateJanuary 15 $.11 = 1 peso $.23 = 1 riyalJanuary 26 $.12 = 1 peso $.24 = 1 riyalJanuary 31 $.13 = 1 peso $.25 = 1 riyalFebruary 15 $.14 = 1 peso $.26 = 1 riyalFebruary 28 $.15 = 1 peso $.27 = 1 riyal

Required: Complete the summary income statement and balance sheet for the month ended January 31, 2011 and February 28, 2011, assuming there were no other transactions.

January 31 February 28

INCOME STATEMENT

Sales

COGS

Gross Margin

Other Operating Expenses

Exchange Gain / (Loss)

Net Income

BALANCE SHEET

Cash

Accounts Receivable

Inventory

Total Assets

Accounts Payable

Common Stock

Retained Earnings

Total Liab and Equity

Answer: January 31 February 28

INCOME STATEMENT

Sales 105,600 30,000

COGS (77,000) (10,000)

Gross Margin 28,600 20,000

Other Operating Expenses (10,000) (15,000)

Exchange Gain / (Loss) (15,600) (1,200)

Net Income 3,000 3,800

BALANCE SHEET

Cash 2,490,000 2,483,800

Accounts Receivable 110,000 -0-

Inventory 33,000 23,000

Total Assets 2,633,000 2,506,800

Accounts Payable 130,000 -0-

Common Stock 2,500,000 2,500,000

Retained Earnings 3,000 6,800

Total Liab and Equity 2,633,000 2,506,800

Objective: LO5

Difficulty: Difficult

3) Plymouth Corporation (a U.S. company) began operations on September 1, 2011, when the owner borrowed $250,000 to establish the business. Plymouth then had the following import and export transactions with unaffiliated Chinese companies:

September 6, 2011 Bought material inventory for 100,000 yuan on account. Invoice denominated in yuan.

September 18, 2011 Sold 80% of inventory acquired on 9/6/11 for 110,000 yuan on account. Invoice denominated in yuan.

October 5, 2011 Acquired and paid the 100,000 yuan owed to the Chinese supplier

October 18, 2011 Collected the 110,000 yuan from the Chinese customer and immediately converted them into U.S. dollars

The following exchange rates apply:Date RateSeptember 6 $0.1544 = 1 yuanSeptember 18 $0.1607 = 1 yuanSeptember 30 $0.1591 = 1 yuanOctober 5 $0.1578 = 1 yuanOctober 18 $0.1593 = 1 yuan

Required:1. What were Sales in the September month-end income statement?2. What was the COGS associated with these sales?3. What is the Accounts Receivable balance in the balance sheet at September 30, 2011?4. What is the Inventory balance in the balance sheet at September 30, 2011?5. What is the Exchange gain or loss that will be reported for the month of September?Answer: 1. Sales = September 18 sale of 110,000 yuan at $.1607 / yuan = $17,6772. COGS = 80% of inventory balance purchased 9/6/11 = 100,000 yuan ×$.1544 = $15,440 × 80% = $12,3523. Accounts Receivable balance = 110,000 yuan × $.1591 = $17,5014. Inventory balance = 100,000 yuan × $.1544 = $15,440 × 20% remaining after sale = $3,0885. Exchange Gain / (Loss) in September =

A/R = 110,000 yuan × ($.1591 - $.1607) = ($176) LossA/P = 100,000 yuan × ($.1591 - $.1544) = ($470) Loss$176 Loss + 470 Loss = ($646) Net Loss in September

Objective: LO5Difficulty: Difficult

4) Charin Corporation, a U.S. corporation, imports and exports small electronics. On December 1, 2011, Charin purchased components from an Egyptian manufacturer amounting to 500,000 Egyptian pounds. The purchase is payable in Egyptian pounds. At December 30, Charin wanted to take advantage of favorable exchange rates, but did not have the full amount required to pay off the entire amount. Charin wired the funds to pay off half of the balance owed, and expected to pay the remaining balance on January 3, 2012. Charin paid the remaining balance on January 3, 2012.

The respective exchange rates were as follows:December 1, 2011 1 pound = $.170December 30, 2011 1 pound = $.165December 31, 2011 1 pound = $.175January 3, 2012 1 pound = $.180

Required: Document the journal entries related to these transactions for the four dates shown. If no entry is required, record "no entry."Answer: Charin's General Journal

Date Account Name Debit Credit12/1/11 Inventory 85,000

Accounts Payable (pound) 85,000

12/30/11 Cash (pound) 41,250Cash 41,250

12/30/11 Accounts Payable (pound) 42,500Exchange Gain 1,250Cash (pound) 41,250

(250,000 pounds × ($.165 - $.170))

12/31/11 Exchange Loss 1,250Accounts Payable (pound) 1,250

(250,000 pounds × ($.175 - $.17))

01/3/12 Cash (pound) 45,000Cash 45,000

01/3/12 Accounts Payable (pound) 43,750Exchange Loss 1,250

Cash (pound) 45,000(250,000 pounds × $0.180)


5) Meric Corporation (a U.S. company) began operations on January 1, 2011, when the owner borrowed $150,000 to start the company. In the first month of operations, Meric had the following transactions:

January 3, 2011 Bought inventory for 100,000 Brazilian real on account. Must be paid with Brazilian real.

January 8, 2011 Sold 60% of inventory acquired on 1/3/11 for 32,000 British pounds on account. Invoice denominated in British pounds.

January 10, 2011 Paid $3,000 in other operating expenses

January 23, 2011 Acquired and paid half of the Brazilian real owed to the Brazilian supplier

January 28, 2011 Collected half of the 32,000 pounds from the customer in Great Britain and immediately converted them into U.S. dollars

The following exchange rates apply:Date Rate RateJanuary 3 $.6260 = 1 real $1.5950 = 1 poundJanuary 8 $.6230 = 1 real $1.5760 = 1 poundJanuary 10 $.6210 = 1 real $1.5880 = 1 poundJanuary 23 $.6250 = 1 real $1.5610 = 1 poundJanuary 28 $.6330 = 1 real $1.5570 = 1 poundJanuary 31 $.6180 = 1 real $1.5720 = 1 pound

Required: Complete the summary income statement and balance sheet for the month ended January 31, 2011 assuming there were no other transactions.

January 31INCOME STATEMENTSalesCOGSGross MarginOther Operating ExpensesExchange Gain / (Loss)Net Income

BALANCE SHEETCashAccounts ReceivableInventory Total Assets

Accounts PayableDebtRetained Earnings Total Liab and EquityAnswer:

January 31INCOME STATEMENTSales 50,432COGS (37,560)Gross Margin 12,872Other Operating Expenses (3,000)Exchange Gain / (Loss) 82Net Income 9,954

BALANCE SHEETCash 140,662Accounts Receivable 25,152Inventory 25,040

Total Assets 190,854

Accounts Payable 30,900Debt 150,000Retained Earnings 9,954 Total Liab and Equity 190,854


6) On June 1, 2011, Puzzle Industries purchases an option contract for $5,000 on 10,000 gallons of aviation gas to minimize its purchasing cost price exposure. At the time, the market price is $2.50 per gallon and the option price of $2 per gallon will expire 6 months later. Puzzle can exercise the option at its discretion. When Puzzle prepares quarterly reports on June 30, Puzzle is still holding the option. On June 30, the market price of aviation gas is $4.50 per gallon. The option is to be settled net.

On August 1, Puzzle exercises the option when the gas market price is $5.00 per gallon and purchases 40,000 gallons of gas. On August 15, Puzzle uses all of the gas on a charter flight.

Required:What are Puzzle's journal entries with regard to the aviation gas option? Assume this is a cash flow hedge. Ignore the time value of money.Answer: Puzzle's General Journal

6/01/11Aviation gas contract option 5,000Cash 5,000

6/30/11Aviation gas contract option 20,000Other comprehensive income 20,000

(($4.50-$2.00) × 10,000 gallons =fair value debit balance of $25,000;unadjusted debit balance = $5,000from June 1 entry.)

8/01/11Cash 30,000Aviation gas contract option 25,000Other comprehensive income 5,000

(Net settlement = ($5 - $2) × 10,000 gallons = $30,000 received)

Aviation gas inventory 200,000Cash 200,000

(40,000 gallons × $5 per gallon)

8/15/11Cost of goods sold 200,000Aviation gas inventory 200,000

Other comprehensive income 25,000Cost of goods sold 25,000

Objective: LO3

Difficulty: Difficult

7) On November 1, 2011, Moddel Company (a U.S. corporation) entered into a 90-day forward contract to purchase 200,000 British pounds. The purpose of the forward contract is to hedge a commitment to purchase special equipment on January 30, 2012 from a British firm Jeckyl Inc. The invoice price on the purchase commitment is denominated in British pounds. The forward contract is not settled net. Assume Moddel uses a 12% interest rate. Use a fair value hedge.

The relevant exchange rates are stated in dollars per pound:Forward Rate

Spot Rate to Jan. 30, 2012November 1, 2011 $1.32 $1.35December 31, 2011 $1.47 $1.50January 30, 2012 $1.55 -

Required:1.What journal entry did Moddel record on November 1, 2011?2.What journal entries did Moddel record on December 31, 2011?3.What journal entries did Moddel record on January 30, 2012 if the purchase was made?Answer: 11/01/11 Contract receivable (pounds) 270,000

Contract payable 270,000(200,000 × $1.35)

12/31/11 Contract receivable (pounds) 30,000Exchange gain 30,000

200,000 × ($1.50 - $1.35)

Exchange loss 30,000Change in value of firm commitment in pounds 30,000

200,000 × ($1.50 - $1.35)

01/30/12 Exchange loss 10,000Change in value of firm commitment in pounds 10,000

200,000 × ($1.55 - $1.50)

Contract receivable (pounds) 10,000Exchange gain 10,000

200,000 × ($1.55 - $1.50)

Contract payable 270,000Cash 270,000

Cash (pounds) 200,000 × $1.55 310,000Contract receivable (pounds) 310,000

Equipment 270,000Change in value of firm commitment 40,000 in pounds

Accounts payable (pounds) 310,000

Accounts payable (pounds) 310,000Cash (pounds) 310,000


8) Texas, Incorporated (a U.S. corporation) sold inventory to a company in the Philippines for 1,600,000 pesos on account on February 1, 2011, with payment expected in 90 days. Texas entered into a forward contract to hedge this transaction, and properly accounts for the transaction as a cash flow hedge. Texas has a March 31 fiscal year end, and uses an 8% discount rate, resulting in a 30-day present value factor of .9934. The forward contract is settled net. The relevant exchange rates are shown below:

Spot RateForward Rate to

May 2, 2011

February 1, 2011 $0.0229 = 1 peso $0.0270 = 1 peso

March 31, 2011 $0.0254 = 1 peso $0.0268 = 1 peso

May 2, 2011 $0.0280 = 1 peso $0.0280 = 1 peso

Required: Record the journal entries needed by Texas on February 1, March 31, and May 2. Round all entries to the nearest whole dollar.Answer: 2/1/11 Accounts receivable (peso) 36,640

Sales 36,640(1,600,000 × 0.0229)

3/31/11 Accounts receivable (peso) 4,000Exchange gain 4,000

(1,600,000 × (0.0254 - 0.0229))

Forward contract 318Other comprehensive income 318

Current forward rate: 1,600,000 pesos × $0.0268 $42,880Contracted forward rate: 1,600,000 pesos × $0.0270 43,200Net change in value 320PV for 30 days @ 6% .9934Fair value of forward contract on 3/31/11 $ 318

Exchange loss 4,000Other comprehensive income 4,000

Other comprehensive income 4,252Exchange gain 4,252

Discount rate = 0.00056435% per month$2,068 + $2,184= $4,252$2,068 = 0.056435 × $36,640$2,184 = [0.056435 × ($36,640 + $2,068)]

05/02/11 Accounts receivable (peso) 4,160Exchange gain 4,160

(1,600,000 × (0.0280-0.0254))

Exchange loss 4,160Other comprehensive income 4,160


($36,640 + $4,252) × 0.056435 = 2,308

Other comprehensive income 1,918Forward contract 1,918

Current forward rate: 1,600,000 pesos × $0.0280 $ 44,800Contracted forward rate: 1,600,000 pesos × $0.0270 43,200Net change in value 1,600Add amount previously recorded 318

1,918

Cash (peso) 44,800Accounts receivable (peso) 44,800

(1,600,000 × 0.028)

Forward contract 1,600Cash 1,600


9) On December 15, 2011, Electronix Company purchased inventory from a foreign supplier for 2,000,000 foreign currency units (fcu's). Payment will be made on February 13, 2012. On December 15, 2011, to hedge the transaction, Electronix signed a forward contract to buy 2,000,000 fcu's in 60 days. Electronix uses a discount rate of 5% resulting in a 45-day present value factor of .9938. The forward contract will be settled net. The related exchange rates are shown below:

Spot RateForward Rate to

2/13/12

December 15, 2011 $0.010 = 1 fcu $0.010 = 1 fcu

December 31, 2011 $0.012 = 1 fcu $0.011 = 1 fcu

February 13, 2012 $0.013 = 1 fcu $0.013 = 1 fcu

On December 15, 2011, Electronix recorded a debit to Inventory and a credit to Accounts Payable (fcu) for $20,000, using the current spot rate.

Required:1. Show the required entries on December 31, 2011 if the hedge is a cash flow hedge. Round to the nearest whole dollar.2. Show the required entries on December 31, 2011 if the hedge is a fair value hedge. Round to the nearest whole dollar.Answer: 1. Year-end entries—Cash flow hedge:

Exchange loss 4,000Accounts payable (fcu) 4,000

(2,000,000 × (.012 - .010))

Forward contract 1,988Other comprehensive income 1,988

Current forward rate: 2,000,000 fcu × $.011 $ 22,000Contracted forward rate: 2,000,000 fcu × $.01 20,000Net change in value 2,000PV for 45 days @ 5% .9938Fair value of forward contract on 12/31/11 $ 1,988


2. Year-end entries - Fair value hedge:Exchange loss 4,000

Accounts payable (fcu) 4,000

Forward contract 1,988Gain on forward contract 1,988


10) On January 1, 2011, Bosna borrowed $100,000 from Lenda. The three-year term note carries a variable rate interest, based on LIBOR, and interest is payable at December 31 of each year, compounded annually. The first year's rate of interest is 7% and Bosna would like to assure that their rate does not increase. Bosna enters into a pay-fixed, receive-variable interest rate swap agreement with Swamp City Bank, under which Bosna will pay 7%, fixed. At December 31, 2011, it is determined that Bosna's interest rate to Lenda for 2012 will be 6%. At December 31, 2012, the interest rate for 2013 was determined to be 8%. Treat as a cash flow hedge.Required: Determine the estimated fair value of the hedge at December 31, 2011, and prepare the related journal entries required to document this hedge and the related interest payments at December 31, 2011, 2012, and 2013, including final repayment on 12/31/13. Assume a flat interest rate curve.

Answer: 12/31/11: Fair value of swap = PV of estimated future net payments:

Estimatedpayment based on Present

Date of payment 12/31/11 rate Factor Value12/31/12 .01 × $100,000 1/(1.06) $94312/31/13 .01 × $100,000 1/(1.06)2 890Total $1,833

12/31/11 Other comprehensive income 1,833Interest rate swap 1,833

Interest Expense 7,000Cash 7,000

12/31/12: Fair value of swap = PV of estimated future net payments:

Estimatedpayment based on Present

Date of payment 12/31/11 rate Factor Value12/31/13 .01 × $100,000 1/(1.08) $ 926

12/31/12 Interest Expense 6,000Cash 6,000

Interest Expense 1,000Cash 1,000

Interest rate swap 2,759Other Comprehensive Income 2,759

12/31/13 Interest Expense 8,000Cash 8,000

Cash 1,000Interest Expense 1,000

Other Comprehensive Income 926Interest rate swap 926

Loan Payable 100,000Cash 100,000


11) Opie Industries is a manufacturer of plastic bottles. On September 1, 2011, Opie purchased an option contract at a cost of $2,000. The purpose of the option is to hedge against increases in the price of this type of plastic, "PET." The option is to buy 1,000,000 pounds of PET on March 1, 2012 for $.75 per pound. If the market price of PET is below $.75 on March 1, Opie will let the option expire. If the market price is above $.75, then Opie will exercise the option. The option is to be settled net. Opie assumes a 6% annual borrowing rate. Assume this is a cash flow hedge.

Required: Prepare the entry that Opie should record on September 1, 2011. Then, assuming that the price of PET is $.72 on December 31, 2011 (Opie's year end), prepare the entry that Opie should record. Finally, prepare the entries for March 1, 2012, assuming that the price of PET is $.78.

Answer: 9/1/11 PET Contract Option 2,000

Cash 2,000

12/31/11 Other comprehensive income 2,000PET Contract Option 2,000

(The option has no value because themarket price is below the exercise price.)

3/1/12 PET Contract Option 30,000Other comprehensive income 30,000

[1,000,000 × ($0.78 - $0.75)]=30,000

3/1/12 PET Inventory 780,000Cash 780,000

Cash 30,000PET Contract Option 30,000


12) Bronn Company purchased all the outstanding stock of Leather Company (a manufacturing company in Argentina) when the book value of Leather's net assets equaled their fair value. Leather's summarized balance sheet is shown below on January 1, 2011, the date of acquisition, and on December 31, 2011, when the exchange rates were $.25 and $.20, respectively. The average exchange rate for 2011 was $.23, and Leather paid dividends in 2011 amounting to 300,000 pesos when the exchange rate was $.21.

January 1, 2011 (Peso)

December 31, 2011

(Peso)

BALANCE SHEET

Cash 1,400,000 1,100,000

Accounts Receivable 400,000 1,400,000

Inventory 1,200,000 1,200,000

Building & Equipment 1,000,000 1,000,000

Accumulated Depreciation (200,000) (300,000)

Total Assets 3,800,000 4,400,000

Accounts Payable 300,000 360,000

Debt Payable 1,000,000 1,000,000

Common Stock 2,000,000 2,000,000

Retained Earnings 500,000 1,040,000

Total Liab. & Equity 3,800,000 4,400,000

Required: If Leather's functional currency and reporting currency are the Argentine peso, compute the change to other comprehensive income that would result from the translation of these financial statements at December 31, 2011.Answer: Book value of beginning net assets = 2,500,000 pesos× change in exchange rates ($.25 to $.20) = (0.05)

$(125,000)Net income (change in R/E + dividends paid) = 840,000× change in exchange rates ($.23 to $.20) = (0.03)

( 25,200)Less Dividends = (300,000) × change in exchange rates ($.21 to $.20) = (0.01)

3,000Other comprehensive income—Translation loss $(147,200)Objective: LO6Difficulty: Difficult

Exercise AdvanceAcctgII

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Transcript of Exercise AdvanceAcctgII