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TEST BANK
CHAPTER 7Foreign Currency Transactions and Hedging
MULTIPLE CHICE
1. To!ic" #a$uation o% %or&ard contractsL 'A U.S. company invests in a forward purchase contract for 100,000,000 yen with a purchase price of $0.009/yen, for delivery in 4 days. !he spot rate at the time thecontract is initiated is $0.00"/yen. At the end of the accountin# year, the forwardcontract is still outstandin#. !he yearend spot rate is $0.00""/yen. !he yearend forwardrate for delivery at the contract date is $0.009%/yen. &ow is the forward contractreported on the U.S. company's (alance sheet)
a. $%0,000 asset (. $%0,000 lia(ilityc. $*0,000 assetd. $*0,000 lia(ility
A+S a
-$0.009% $0.009 100,000,000 $%0,000
%. To!ic" Cas( %$o& (edgeL )n Au#ust 1, a U.S. company enters into a forward contract, in which it a#rees to (uy1,000,000 euros from a (an2 at a rate of $1.11 on 3ecem(er 1. han#es in the value of
the forward contract will (e reported in other comprehensive income on the (alance sheetin which one of the followin# situations)
a. !he U.S. company has receiva(les denominated in euros, with payment to (ereceived on 3ecem(er 1.
(. !he U.S. company sold merchandise to a customer in 5el#ium on Au#ust 1, andepects payment of 1,000,000 euros on 3ecem(er 1.
c. !he U.S. company plans to sell merchandise to a customer in 5el#ium on Au#ust1, with payment of 1,000,000 euros epected on 3ecem(er 1.
d. !he U.S. company plans to purchase merchandise from a supplier in 5el#ium, with payment of 1,000,000 euros epected to (e paid on 3ecem(er 1.
A+S d
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Use the followin# information on the U.S. dollar value of the euro to answer 6uestions * 7 8 (elow
S!ot rate
For&ard rate %orA!ri$ '*+ ,*--
de$i.ery
cto(er *0, %010 $ 1.% $ 1.*03ecem(er *1, %010 1.%" 1.*%April *0, %011 1.% 1.%
n cto(er *0, %010, a company enters a forward contract to sell :100,000 on April *0, %011.!he company's accountin# year ends 3ecem(er *1.
*. To!ic" Hedge o% e/!ort transactionL 0!he forward contract hed#es an outstandin# :100,000 account receiva(le due on April *0.
;hat is the net effect on income in %010 and %011)
,*-* ,*--a. $1,000 #ain $4,000 #ain (. $1,000 loss $4,000 #ainc. $*,000 #ain $,000 #aind. $%,000 loss $,000 #ain
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%010
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4. To!ic" Hedge o% %ir1 co11it1entL 2!he forward contract hed#es a sales order for :100,000, received cto(er *0. !he salewas made and the :100,000 collected on April *0, %011. Sales revenue recorded on April*0 is
a. $1%,000 (. $1%%,000c. $1*0,000d. $1%4,000
A+S c
-:100,000 $1.% > -$1.*0 $1.% :100,000 $1*0,000
. To!ic" Hedge o% %ir1 co11it1entL 2!he forward contract hed#es a sales order for :100,000, received cto(er *0. !he salewas made and the :100,000 collected on April *0, %011. !he net effect on %010 incomeis
a. +o effect (. $%,000 lossc. $*,000 #aind. $1,000 #ain
A+S a
!he #ain on the firm commitment and loss on the forward contract are -$1.*% $1.*0 :100,000 $%,000, and they offset for a ?ero effect on %010 income.
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. To!ic" Hedge o% %orecasted transactionL )!he forward contract hed#es a forecasted sale for :100,000, epected at the end of April%011. !he net effect on %010 income is
a. +o effect
(. $%,000 lossc. $*,000 #aind. $1,000 #ain
A+S a
!he loss on the forward contract is reported in other comprehensive income.
8. To!ic" Hedge o% %orecasted transactionL )!he forward contract hed#es a forecasted sale for :100,000, epected at the end of April%011. !he sale ta2es place on April *0, %011, :100,000 is collected, and the forwardcontract is closed. ;hich statement is true, concernin# the sale on April *0, %011)
a. !he $1,000 total loss on the forward contract is reclassified from othercomprehensive income as an ad@ustment to sales revenue.
(. !he $4,000 total #ain on the forward contract is reclassified from othercomprehensive income as an ad@ustment to sales revenue.
c. !he %011 $,000 #ain on the forward contract is reco#ni?ed as a hed#in# #ain onthe %011 income statement.
d. !he %010 $%,000 loss on the forward contract is reco#ni?ed as a hed#in# loss onthe %010 income statement.
A+S (
!he total #ain on the forward contract is -$1.*0 $1.% :100,000 $4,000. han#esin the value of the forward are reported in other comprehensive income until the hed#edforecasted transaction is reported in income. n this case, the forecasted transactionresults in sales revenue, reported in %011.
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". To!ic" E/!ort transactionL ,n Bay %0, %01%, when the spot rate is $1.*0/:, a company sells merchandise to acustomer in taly. !he spot rate is $1.*1/: on Cune *0, the company's yearend. Daymentof :100,000 is received on Culy *0, %01%, when the spot rate is $1.%"/:. ;hat is the effecton fiscal %01% and %01* income)
Fisca$ ,*-, Fisca$ ,*-'a. $1,000 echan#e loss $*,000 echan#e #ain (. $1,000 echan#e #ain $*,000 echan#e lossc. +o effect $%,000 echan#e lossd. +o effect $%,000 echan#e #ain
A+S (
Eiscal %01% echan#e #ain -$1.*1 $1.*0 :100,000 $1,000Eiscal %01* echan#e loss -$1.*1 $1.%" :100,000 $*,000
9. To!ic" I1!ort transactionL ,n Bay %0, %01%, when the spot rate is $1.*0/:, a company purchases merchandise froma supplier in taly. !he spot rate is $1.*1/: on Cune *0, the company's yearend. Daymentof :100,000 is made on Culy *0, %01%, when the spot rate is $1.%"/:. ;hat is the effect onfiscal %01% and %01* income)
Fisca$ ,*-, Fisca$ ,*-'a. $1,000 echan#e loss $*,000 echan#e #ain (. $1,000 echan#e #ain $*,000 echan#e loss
c. +o effect $%,000 echan#e lossd. +o effect $%,000 echan#e #ain
A+S a
Eiscal %01% echan#e loss -$1.*1 – $1.*0 :100,000 $1,000Eiscal %01* echan#e #ain -$1.*1 – $1.%" :100,000 $*,000
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3ata for 6uestions 10 and 11 are as follows
n Septem(er ", the Sealy ompany purchased cotton at an invoice price of :%0,000, when theechan#e rate was $1.*%/:. Dayment was to (e made on +ovem(er ". n +ovem(er ", Sealy purchased the :%0,000 for $1.*0/:, and paid the invoice.
10. To!ic" I1!ort transactionL ,!he cotton should (e valued in SealyFs inventory at
a. $%0,000 (. $%,00c. $%,000d. $%,400
A+S d
€%0,000 $1.*% $%,400
11. To!ic" I1!ort transactionL ,!he echan#e #ain or loss reco#ni?ed (y Sealy as a result of this transaction is
a. +o #ain or loss (. $400 #ainc. $400 lossd. $1,8 #ain
A+S (€%0,000 -$1.*% $1.*0 $400 #ain
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3ata for 6uestions 1% and 1* are as follows
n Cune , !eneco orporation sold merchandise at an invoice price of :100,000, when theechan#e rate was $1.*/:. Dayment was to (e received on Au#ust 1. n Au#ust 1, thecustomer paid the :100,000. !he echan#e rate on that date was $1.*9/:.
1%. To!ic" E/!ort transactionL ,!he sale should (e reported on !enecoFs (oo2s at
a. $1*,000 (. $1*9,000c. $ 8*,*0d. $ 81,94%
A+S a
:100,000 $1.* $1*,000
1*. To!ic" E/!ort transactionL ,!he echan#e #ain or loss reco#ni?ed (y !eneco as a result of this transaction is
a. 0 (. $*,000 #ainc. $*,000 lossd. $*,919 loss
A+S (
:100,000 -$1.*9 1.* $*,000 #ain
©Cambridge Business Publishers, 2010
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14. To!ic" Ana$ysis o% %oreign currency ris3sL 'A U.S. eporter has made a sale to a customer in another country. !he customer iso(li#ated to remit payment in his local currency in 90 days. !he direct spot rate is now$1.4. !he 90day forward rate is $1.0. At which spot rate at the time the customerremits payment would the company have (een (etter off not hed#in# the eport
transaction with a forward contract)
a. $1.% (. $1.4c. $1.9d. $1.%
A+S d
Any rate a(ove $1.0 leads to hi#her U.S. dollar value of payment received than under theforward contract.
1. To!ic" Foreign currency o!tionsL 'A company invests $%00 in a forei#n echan#e option with the followin# terms !hecompany may purchase 1,000,000 ?loty at a price of $.%/?loty on 3ecem(er %0, %014.;hich statement is true)
a. f the spot price for ?loty is $.* on 3ecem(er %0, the company will #ain $*9,"00on the option.
(. f the spot price for ?loty is $.%4 on 3ecem(er %0, the company will lose $%00 onthe option.
c. f the spot price for ?loty is $.%8 on 3ecem(er %0, the company will lose $%0,%00on the option.
d. f the spot price for ?loty is $.*0 on 3ecem(er %0, the company will #ain $%4,"00on the option.
A+S (
!he option #ives the holder the option to (uy 1,000,000 ?loty for $%0,000. At a spot price of $.%4/?loty, the option has no value and the holder loses its $%00 investment.
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1. To!ic" Hedge o% i1!ort transactionL 0A U.S. import company purchases (oomeran#s from an Australian supplier on cto(er 1,%01* for 100,000 Australian dollars -A$, paya(le Ee(ruary 1, %014. n cto(er 1, %01*,the company enters into a forward contract to hed#e the forei#n currency ris2 resultin#from this purchase. Gchan#e rates are as follows
S!ot rate
For&ardrate %or ,4-
de$i.ery
cto(er 1, %01* $0."9 $0."
3ecem(er *1, %01* 0."" 0."4
Ee(ruary 1, %014 0."% 0."%
Eor the import company, what is the income statement effect of the a(ove information)
a. +o effect in %01*, $4,000 #ain in %014
(. $1,000 #ain in %01*, $,000 #ain in %014c. $1,000 loss in %01*, $,000 loss in %014d. +o effect in %01*, $4,000 loss in %014
A+S a
%01*
forward contract -$." $."4 A$100,000 $1,000 loss
paya(le -$."9 $."" A$100,000 1,000 #ain
0
%014
forward contract -$."4 $."% A$100,000 $%,000 loss paya(le -$."" $."% A$100,000 ,000 #ain
$4,000 #ain
©Cambridge Business Publishers, 2010
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18. To!ic" Hedge o% %ir1 co11it1entL 2A5 orporation issues a purchase order for 1,000,000 semiconductors to a forei#nsupplier. !he a#reed upon total price is E1,%00,000, and the current spot rate is $1/E.Suppose a forward contract is ta2en out when the purchase order is issued, at a rate of$0.9/E, for delivery when the semiconductors are received. f the spot rate rises to
$1.0 when the semiconductors are received and paid for (y A5, at what value will thesemiconductors (e reported on A5's (oo2s)
a. $1,0%0,000 (. $1,140,000c. $1,%00,000d. $1,%0,000
A+S (
$1.0 E1,%00,000 $1,%0,000
-$1.0 $.9 E1,%00,000 -1%0,000
$1,140,000
Use the followin# information to answer 6uestions 1" and 19 (elow.
A U.S. company purchases a 0day certificate of deposit from an talian (an2 on cto(er 1.!he certificate has a face value of :1,000,000, costs $1,%00,000 -the spot rate is $1.%0/:, and pays interest at an annual rate of percent. n 3ecem(er 14, the certificate of deposit maturesand the company receives principal and interest of :1,010,000. !he spot rate on 3ecem(er 14 is$1.1"/:. !he avera#e spot rate for the period cto(er 1 7 3ecem(er 14 is $1.19/:.
1". To!ic" Foreign currency $endingL ,!he echan#e #ain or loss on this investment is
a. $%0,%00 #ain (. $%0,%00 lossc. $%0,000 #aind. $%0,000 loss
A+S d
:1,000,000 -$1.%0 $1.1" $%0,000 loss
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19. To!ic" Foreign currency $endingL ,nterest income on the investment is reported at
a. $0 (. $11,"00
c. $11,900d. $1%,000
A+S (
€10,000 $1.1" $11,"00
Use the followin# information to answer 6uestions %0 7 %% (elow
A U.S. company anticipates that it will purchase merchandise for €10,000,000 at the end of Culy,and pay for it at the end of Septem(er. n Barch 1, it enters a forward contract to (uy€10,000,000 on Septem(er *0. !he forward contract 6ualifies as a cash flow hed#e. !hecompany's accountin# year ends 3ecem(er *1. !he company actually purchases the merchandiseon Culy *0 and closes the forward contract and pays for the merchandise on Septem(er *0. t stillholds the merchandise at the end of the year. Gchan#e rates are as follows
S!ot rate
For&ard rate%or 54'* de$i.ery
Barch 1 $1.40 $1.41
Culy *0 1.4% 1.41
Septem(er *0 1.4* 1.4*
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%0. To!ic" Hedge o% %orecasted transactionL )!he merchandise is reported on the yearend (alance sheet at
a. $14,100,000 (. $14,10,000
c. $14,%00,000d. $14,*00,000
A+S c
C(anges in t(e .a$ue o% t(e %or&ard contract re1ain in ot(er co1!re(ensi.e inco1eunti$ t(e 1erc(andise is so$d. !he merchandise is reported at the spot rate at the date of purchase, $1.4%.
%1. To!ic" Hedge o% %orecasted transactionL );hat is the net effect on income for the year)
a. +o effect (. $100 lossc. $100 #aind. $0 #ain
A+S a
C(anges in t(e .a$ue o% t(e %or&ard are re!orted in ot(er co1!re(ensi.e inco1e6 !he $100 loss on the paya(le is eactly offset (y a reclassification of $100 out of other
comprehensive income, so there is no net effect on income.
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%%. To!ic" Hedge o% %orecasted transactionL );hen the merchandise is sold, what amount is reported for cost of #oods sold)
a. $14,100,000 (. $14,10,000
c. $14,%00,000d. $14,*00,000
A+S a
At the end of the year, other comprehensive income has a credit (alance of $100. ;henthe merchandise is sold, it is reclassified as a reduction in cost of #oods soldH $14,100,000 $14,%00,000 $100,000.
ourna$ entries re$ated to 8uestions ,* 9 ,, (in thousands)"
Culy *0
nventory 14,%00
Accounts paya(le 14,%00
nvestment in forward 0
ther comprehensive income 0
Septem(er *0
Gchan#e loss 100
Accounts paya(le 100
nvestment in forward 10
ther comprehensive income 10
ther comprehensive income 100
Gchan#e #ain 100
Accounts paya(le 14,*00
ash 14,100
nvestment in forward %00
:(en 1erc(andise is so$d"ost of #oods sold 14,100
ther comprehensive income 100
nventory 14,%00
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Use the followin# information on the U.S. dollar value of the euro to answer 6uestions %* 7 %
S!ot rate
For&ard rate %orMarc( ,*+ ,*-,
de$i.ery
+ovem(er *0, %011 $ 1.*0 $ 1.%93ecem(er *1, %011 1.** 1.*1Barch %0, %01% 1.* 1.*
%*. To!ic" S!ecu$ati.e %or&ard !urc(ase contractL 7n +ovem(er *0, %011, a U.S. company, with a 3ecem(er *1 yearend, enters a forward!urc(ase contract for :100,000 to (e delivered on Barch %0, %01%. !he forwardcontract does not 6ualify as a hed#e. !he company closes the contract at its epirationdate. ;hich statement is true)
a. +o #ain or loss is reported until the forward is closed on Barch %0 (. A #ain of $%,000 is reported in %01%c. A #ain of $4,000 is reported in %01%d. A #ain of $,000 is reported in %01%
A+S c
!he chan#e in value of the forward is reported in income as the forward rate chan#es. Eor %01%, the #ain is -$1.* $1.*1 :100,000 $4,000.
%4. To!ic" S!ecu$ati.e %or&ard sa$e contractL 7n +ovem(er *0, %011, a U.S. company, with a 3ecem(er *1 yearend, enters a forwardsa$e contract for :100,000 to (e delivered on Barch %0, %01%. !he forward contractdoes not 6ualify as a hed#e. !he company closes the forward contract on 3ecem(er *1.;hich statement is true)
a. +o #ain or loss is reported (. A loss of $1,000 is reported in %011c. A loss of $*,000 is reported in %011d. A loss of $%,000 is reported in %011
A+S d
!he chan#e in value of the forward is reported in income as the forward rate chan#es. Eor %011, the loss is -$1.*1 $1.%9 :100,000 $%,000
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%. To!ic" IFRS %or (edge o% a %orecasted !urc(aseL ;n +ovem(er *0, %011, a U.S. company, with a 3ecem(er *1 yearend, enters a forward!urc(ase contract for :100,000 to (e delivered on Barch %0, %01%. !he contract hed#esa forecasted purchase of e6uipment. !he forward is closed and the e6uipment purchased
on Barch %0. f the company follows EIS and reports #ains and losses on hed#es offorecasted transactions as (asis ad@ustments, total de!reciation e/!ense over the life ofthe e6uipment is
a. $1%9,000 (. $1*0,000c. $1*1,000d. $1*,000
A+S a
!he e6uipment is recorded at the spot rate of $1.* :100,000 $1*,000, ad@usted forthe $,000 J $1.* $1.%9 :100,000K #ain on the forward contract.
%. To!ic" E/c(ange ratesL -!he value of the euro chan#es from $1.*9 to $1.4*. ;hich statement is true concernin#chan#es in the value of the euro in relation to the U.S. dollar)
a. Gach U.S. dollar can (e echan#ed for more euros. (. Gach euro can (e echan#ed for fewer U.S. dollars.c. !he U.S. dollar has stren#thened with respect to the euro.
d. A $10 product can (e purchased with fewer euros.
A+S d
%8. To!ic" E/c(ange ratesL -nformal mar2ets contractin# for future delivery of forei#n currencies are called
a. Spot mar2ets (. Eorward mar2ets
c. Eutures mar2etsd. 3irect mar2ets
A+S (
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%". To!ic" For&ard sa$e (edging %oreign currency recei.a
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*0. To!ic" For&ard sa$e (edging %orecasted transactionL )A U.S. company sells its products to customers in Capan, priced in yen. t hed#es aforecasted sale to a Capanese customer with a forward sale of yen. han#es in the value of the hed#e investment are
a. Ieported in other comprehensive income until the products are produced (. Ieported as ad@ustments to sellin# and administrative epenses when the products
are soldc. Ieported in income as the chan#es occur d. Ieported in other comprehensive income until the products are sold
A+S d
*1. To!ic" S!ecia$ (edge accounting+ cas( %$o& (edgesL '+ )han#es in the mar2et value of forward forei#n currency contracts used to hed#eforecasted sales of merchandise to customers are
a. Ieported on the income statement if the forwards 6ualify for special hed#eaccountin# and in other comprehensive income if they don't 6ualify.
(. Ieported as a direct ad@ustment to retained earnin#s if they 6ualify for specialhed#e accountin# and on the income statement if they don't 6ualify.
c. Ieported in other comprehensive income if they 6ualify for special hed#eaccountin# and on the income statement if they don't 6ualify.
d. +ot reported if they 6ualify for special hed#e accountin# and reported on theincome statement if they don't 6ualify.
A+S c
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*%. To!ic" Cas( %$o& (edgesL '+ );hich one of the followin# is a cash flow hed#e for a U.S. company)
a. A hed#e of eurodenominated receiva(les (. A hed#e of a planned purchase of inventory, denominated in pesos
c. A hed#e of a sales order from a customer in the U.L., denominated in poundsd. A hed#e of paya(les denominated in U.S. dollars
A+S (
**. To!ic" Identi%ication o% (edge in.est1entsL ';hich of the followin# is not a hed#e investment)
a. A U.S. company issues a purchase order to a supplier in Beico who re6uires payment in pesos, and invests in a put option in pesos.
(. A U.S. company has de(t denominated in euros, and invests in a forward purchaseof euros.
c. A U.S. company's customers owe it several million pesos from credit sales, and thecompany invests in a forward sale of pesos.
d. A U.S. company invests in corporate (onds denominated in euros and enters a putoption in euros.
A+S a
*4. To!ic" Identi%ication o% (edge in.est1ents
L 'Mou are a U.S. investor and you epect that the value of the euro, in U.S. dollar terms,will increase. ;hich of the followin# investments would you ma2e)
a. Short position in euro futures. (. Dut option in euros.c. 5orrow from a (an2 in taly, payment denominated in euros.d. Eorward purchase of euros.
A+S d
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*. To!ic" =eri.ati.es disc$osuresL 7SFAS 161, effective at the end of %00", provides that
a. &ed#es reported as assets (e com(ined with hed#es reported as lia(ilities. (. All hed#ed items (e carried at mar2et value.
c. Additiona$ %ootnote disc$osures detai$ (edging gains and $osses
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*". To!ic" Hedging %inancia$ ris3 L -+ ';hich statement (elow (est descri(es the process of hed#in# usin# financial derivatives)
a. Mou have inside information that the $/yen rate is #oin# to rise, so you invest in a
financial derivative that allows you to #ain if the $/yen rate rises. (. Mou have inside information that the $/euro rate is #oin# to fall, so you invest in a
financial derivative that allows you to #ain if the $/euro rate falls.c. As part of your normal (usiness transactions, you are eposed to financial ris2.
Mou invest in financial derivatives to increase potential #ains from financial ris2.d. As part of your normal (usiness transactions, you are eposed to financial ris2.
Mou invest in financial derivatives to reduce that ris2.
A+S d
*9. To!ic" Hedging %inancia$ ris3 L -+ 'A U.S. manufacturin# company imports parts from a supplier in
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41. To!ic" #a$uation o% %or&ard contractsL 'n 3ecem(er 1, a U.S. company a#rees to (uy euros on Ee(ruary 1 at a contract price of$1.40. !he company did not pay anythin# for this contract. !he echan#e rate for eurosdeclines to $1.*" -U.S. dollar stren#thens (etween 3ecem(er 1 and 3ecem(er *1, whenthe company's reportin# year ends. &ow is this contract reported on the company's year
end (alance sheet)
a. n the asset section (. In t(e $ia
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4*. To!ic" Foreign currency
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4. To!ic" Hedge accountingL '!wo ma@or #oals of SFAS 133 are
a. 3isclose the fair values of derivatives investments in the footnotes of the financialstatements, and report hed#ed assets and lia(ilities at fair value on the (alance
sheet. (. Ieport the fair values of derivatives investments on the (alance sheet, and report
hed#ed assets and lia(ilities at fair value on the (alance sheet.c. Ieport the fair values of derivatives investments on the (alance sheet, and match
#ains and losses on hed#e investments and hed#ed assets and lia(ilities on the sameincome statement.
d. Ieport hed#ed assets and lia(ilities at fair value on the (alance sheet, and match#ains and losses on hed#e investments and hed#ed assets and lia(ilities on the sameincome statement.
A+S c
48. To!ic" Hedge o% %orecasted transactionL )A U.S. company hed#es an anticipated sale of merchandise to a forei#n customer. ;henare #ains and losses on the hed#e investment reported on the income statement)
a. ;hen the customer pays for the merchandise (. ;hen the anticipated sale (ecomes a firm commitmentc. ;hen the hed#e investment is determined to (e an effective hed#ed. ;hen the merchandise is sold
A+S d
4". To!ic" S!ecu$ati.e in.est1entsL 7A U.S. company enters a forward purchase contract that does not 6ualify as a hed#einvestment. ;hen are #ains and losses on the hed#e investment reported on the incomestatement)
a. ;hen the forward contract chan#es in mar2et value (. ;hen the forward contract is closed
c. ;hen the forward contract is determined to (e an effective hed#ed. ;hen the merchandise is sold
A+S a
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49. To!ic" Hedge o% %oreign>currency>deno1inated !aya
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PRBLEMS
1. To!ic" Fair .a$ue (edge o% recei.a
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a. i. $100,000 $."% $"%,000ii. $100,000 $." $",000iii. $100,000 -$." $."* $%,000 loss
(. i. $100,000 -$."1 $." $,000 lia(ilityii. $100,000 $."1 $"1,000
c. i. $100,000 -$."1 $." $,000 assetii. $"*,000 7 -$."* $."1-$100,000 $"1,000
%. To!ic" Un(edged %oreign currency transactions+ (edges o% %ir1 co11it1entsL ,+ 0+ 2A U.S. company (uys merchandise from suppliers in the U.L., and pays for themerchandise in pounds sterlin#. ts accountin# year ends 3ecem(er *1. Use the followin#information on $/P to answer the 6uestions (elow.
S!ot rate
For&ard rate %or de$i.ery
Marc( -+ ,*-'
cto(er 1, %01% $1.%9 $1.%"
+ovem(er 1, %01% 1.*0 1.*%
3ecem(er *1, %01% 1.* 1.*4
Barch 1, %01* 1.*8 1.*8
Required Answer the followin# 6uestions
a. !he U.S. company ta2es delivery of merchandise costin# P1,000,000 on +ovem(er 1, %01%. !he company pays for the merchandise, in pounds, on Barch 1, %01*. +o hed#in# is involved. !he company sells the merchandise on Cune 1, %01*.;hat amounts will appear on the financial statements of the U.S. company fori. Accounts paya(le, 3ecem(er *1, %01% (alance sheetii. Gchan#e #ain or loss, %01% income statementiii. ost of #oods sold, %01* income statement
(. Assume the same facts as in a. a(ove, (ut the U.S. company issues a purchaseorder on cto(er 1, %01% (efore ta2in# delivery on +ovem(er 1. n cto(er 1the company also enters a forward contract to hed#e its EN ris2, for delivery of
pounds on Barch 1, %01*. ;hat amounts will appear on the financial statementsof the U.S. company fori. nvestment in forward contract, 3ecem(er *1, %01% (alance sheet
ii. ost of #oods sold, %01* income statement
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a. i. P1,000,000 $1.* $1,*0,000ii. P1,000,000 -$1.*0 $1.* $0,000 lossiii. P1,000,000 $1.*0 $1,*00,000
(. i. P1,000,000 -$1.%" $1.*4 $0,000 assetii. P1,000,000 $1.*0 7 JP1,000,000 -$1.%" $1.*%K $1,%0,000
*. To!ic" Un(edged %oreign currency transactions+ (edges o% i1!ort and%orecasted transactionsL ,+ 0+ )Eollowin# are echan#e rates for the euro -U.S. $/: . mport Gpress is a U.S. companywhose accountin# year ends on 3ecem(er *1.
S!ot rate
For&ard rate %orMay '-+ ,*--
de$i.ery
+ovem(er *0, %010 $ 1.% $ 1.*03ecem(er *1, %010 1.%" 1.*%Bay *1, %011 1.% 1.%
Required Answer the followin# 6uestions.
a. n +ovem(er *0, %010, mport Gpress ta2es delivery of merchandise on creditfrom an talian supplier for :1,000. t pays for the merchandise on Bay *1, %011.t sells the inventory to a U.S. customer durin# %011. ;hat are the correct
amounts that will appear on mport Gpress' financial statements for each of thefollowin# items)i. Accounts paya(le, 3ecem(er *1, %010 (alance sheetii. ost of #oods sold, %011 income statementiii. Eorei#n echan#e loss, %010 income statement
(. n +ovem(er *0, %010, mport Gpress ta2es delivery of merchandise on creditfrom an talian supplier for :1,000. n the same day, it a#rees to (uy :1,000-forward purchase for delivery on Bay *1, %011. mport Gpress closes theforward on Bay *1 and pays for the merchandise. t sells the inventory to a U.S.customer durin# %011. ;hat are the correct amounts that will appear on mport
Gpress' financial statements for each of the followin# items)i. nvestment in forward contract, 3ecem(er *1, %010 -assetii. =oss on forward contract, %011
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c. n +ovem(er *0, %010, mport Gpress forecasts that it will need to (uymerchandise for :1,000 from an talian supplier at the end of Bay, %011. t plansto pay for the merchandise as soon as it is delivered. n +ovem(er *0, %010,mport Gpress a#rees to (uy :1,000 -forward purchase for delivery on Bay *1,%011. !he forward contract 6ualifies as a cash flow hed#e of the forecasted
purchase of merchandise. !he merchandise is actually delivered on Bay *1, %011.mport Gpress closes the forward and immediately pays the supplier. !hemerchandise is su(se6uently sold to a U.S. customer later in %011. Ba2e the @ournal entries necessary to record these eventsi. 3ecem(er *1, %010 Ad@ust the investment in forward contract.ii. Bay *1, %011
-1 Ad@ust the investment in forward contract.-% lose out the forward contract.-* !a2e delivery of the merchandise and pay for it.
iii. Iecord cost of sales for %011.
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a. Gntries -not re6uired
11/*0nventory 1,%0
Accounts paya(le 1,%0
1%/*1Gchan#e loss *0
Accounts paya(le *0
/*1Accounts paya(le %0
Gchan#e #ain %0
Accounts paya(le 1,%0ash 1,%0
i. Accounts paya(le, 3ecem(er *1, %010 (alance sheet $1,%"0ii. ost of #oods sold, %011 income statement $1,%0ii. Gchan#e loss, %010 income statement $ *0
©Cambridge Business Publishers, 2010 2% Advanced Accounting, 1stdition
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(. Gntries -not re6uired
11/*0nventory 1,%0
Accounts paya(le 1,%0
1%/*1Gchan#e loss *0
Accounts paya(le *0nvestment in forward %0
Gchan#e #ain %0
/*1Accounts paya(le %0
Gchan#e #ain %0
Gchan#e loss 0nvestment in forward 0
Eorei#n currency 1,%0nvestment in forward 40
ash 1,*00Accounts paya(le 1,%0
Eorei#n currency 1,%0
i. nvestment in forward contract, 3ecem(er *1, %010 -asset $%0ii. =oss on forward contract, %011 $0
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c. i.
nvestment in forward %0ther comprehensive income %0
ii. -1ther comprehensive income 0
nvestment in forward 0
-%Eorei#n currency 1,%0nvestment in forward 40
ash 1,*00
-*nventory 1,%0
Eorei#n currency 1,%0
iii.ost of #oods sold 1,*00
ther comprehensive income 40nventory 1,%0
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4. To!ic" For&ard !urc(ase+ cas( %$o& (edge t(at
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3ecem(er *1, %011 Gnd of year ad@ustin# entry
nvestment in forward 00,000
ther comprehensiveincome 00,000
Canuary *1, %01% Ad@ust the investment
nvestment in forward %00,000
ther comprehensiveincome %00,000
Barch *1, %01% Ad@ust for the period Canuary *1 Barch *1, and ta2e delivery ofthe merchandise.
nvestment in forward *00,000
ther comprehensiveincome *00,000
Gchan#e loss *00,000
Eirm commitment *00,000
ther comprehensive income *00,000
Gchan#e #ain *00,000
nventory 1,*00,000
Eirm commitment *00,000
Accounts paya(le 1,00,000
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April *0, %01% Ad@ust for the period Barch *1 to April *0, close the forwardcontract and pay the supplier.
nvestment in forward %00,000
ther comprehensiveincome %00,000
Gchan#e loss 400,000Accounts paya(le 400,000
ther comprehensive income 400,000
Gchan#e #ain 400,000
Eorei#n currency 1,000,000
nvestment in forward 1,%00,000
ash 14,"00,000
Accounts paya(le 1,000,000
Eorei#n currency 1,000,000
ost of #oods sold 14,"00,000
ther comprehensive income 00,000
nventory 1,*00,000
©Cambridge Business Publishers, 2010
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. To!ic" Hedge o% %ir1 co11it1entL 2Eollowin# is information on $/: echan#e rates
S!ot rateFor&ard rate %or de$i.ery
August -2+ ,*-,
Barch 1, %01% $1.0 $1.Cune *0, %01% 1.0 1.%
Au#ust 1, %01% 1. 1.
A U.S. company (uys from suppliers in
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. To!ic" Hedge o% %ir1 co11it1entL 2n +ovem(er 1, %01%, a U.S. company issues a purchase order to (uy merchandise for :1,000,000. !he company epects to ta2e delivery of the merchandise on Canuary 10,%00", and will pay the supplier on Barch 1, %01*. !o hed#e its EN ris2, on +ovem(er 1,%01% the company invests in a forward contract for delivery of :1,000,000 on Barch 1,
%01*. !he company sells the merchandise to a U.S. customer for $%,000,000 in cash onApril 1, %01*. Assume the forward contract 6ualifies as a fair value hed#e of the firmcommitment to (uy merchandise.
Gchan#e rates for the euro -$/: are (elow.
S!ot rateFor&ard rate %or
Marc( -+ ,*-' de$i.ery
+ovem(er 1, %01% $ 1.40 $1.4%
3ecem(er *1, %01% 1.41 1.4*
Canuary 10, %01* 1.44 1.4*
Barch 1, %01* 1.4 1.4
Required Eor each date (elow, prepare the necessary @ournal entries to record the events and/orad@ustments needed.
a. 3ecem(er *1, %01% -end of year closin# (. Canuary 10, %01* -ta2es delivery of merchandisec. Barch 1, %01* -closes the forward and pays the (illd. April 1, %01* -sells the merchandise to a U.S. customer. Assume the company
uses the perpetual inventory method.
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a. 3ecem(er *1, %01%
nvestment in forward 10,000
Gchan#e #ain 10,000
Gchan#e loss 10,000Eirm commitment 10,000
Iate chan#es from $1.4% to $1.4*.
(. Canuary 10, %01*
nvestment in forward ,000
Gchan#e #ain ,000
Gchan#e loss ,000
Eirm commitment ,000
Iate chan#es from $1.4* to $1.4*.
nventory 1,4%,000
Eirm commitment 1,000
Accounts paya(le 1,440,000
c. Barch 1, %01*
Gchan#e loss 10,000
Accounts paya(le 10,000
Iate chan#es from $1.44 to $1.4.
nvestment in forward 1,000
Gchan#e #ain 1,000Iate chan#es from $1.4* to $1.4.
Eorei#n currency 1,40,000
ash 1,4%0,000
nvestment in forward *0,000
Accounts paya(le 1,40,000
Eorei#n currency 1,40,000
d. April 1, %01*
ash %,000,000Sales revenue %,000,000
ost of #oods sold 1,4%,000
nventory 1,4%,000
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8. To!ic" I1!ort and e/!ort transactionsL ,Eollowin# is information on $/: echan#e rates
S!ot rate
+ovem(er 1, %01* $1.4%
3ecem(er *1, %01* 1.*"Ee(ruary 1, %014 1.*
Barch 1, %014 1.*
Required Answer the followin# 6uestions
a. A U.S. company sells merchandise to customers in euro countries, with payment to (e received in euros. Sales totalin# :1,000,000 occur on +ovem(er 1, %01*.Dayment is made on Barch 1, %014. !he U.S. company's accountin# year ends3ecem(er *1. ;hat amounts will appear on the financial statements of the U.S.
company fori. Sales revenue, %01* income statementii. Accounts receiva(le, 1%/*1/1* (alance sheetiii. Gchan#e #ain or loss, %01* income statement
(. A U.S. company (uys merchandise from suppliers in euro countries, paya(le ineuros. Durchases of :1,000,000 are made on +ovem(er 1, %01*. !he U.S.company pays the suppliers on Ee(ruary 1, %014. !he U.S. company sells themerchandise to its customers on Barch 1, %014. !he U.S. company's accountin#year ends 3ecem(er *1. ;hat amounts will appear on the financial statements ofthe U.S. company fori. Accounts paya(le, 1%/*1/1* (alance sheetii. Gchan#e #ain or loss, %014 income statementiii. ost of #oods sold, %014 income statement
A+S
a. i. :1,000,000 $1.4% $1,4%0,000ii. :1,000,000 $1.*" $1,*"0,000iii. :1,000,000 -$1.*" $1.4% $40,000 loss
(. i. :1,000,000 $1.*" $1,*"0,000ii. :1,000,000 -$1.*" $1.* $%0,000 #ain
iii. :1,000,000 $1.4% $1,4%0,000
©Cambridge Business Publishers, 2010
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". To!ic" Hedges o% e/!ort transactionsL 0A U.S. company sells merchandise to a
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9. To!ic" Hedge o% %ir1 co11it1entL 2n Ee(ruary 1, %010, a U.S. company issues a purchase order to (uy merchandise from a
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ii.
Gchan#e loss 14,000
nvestment in forward 14,000
Accounts paya(le 10,000
Gchan#e #ain 10,000
Eorei#n currency 1,**0,000
nvestment in forward %0,000
ash 1,*0,000
Accounts paya(le 1,**0,000
Eorei#n currency 1,**0,000
(. $1,00,000 $1,*4,000 $%4,000
10. To!ic" Hedge o% %orecasted transactionL )A U.S. corporation purchases merchandise from a
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a.
nvestment in forward %,000
ther comprehensive income %,000
(.ther comprehensive income 4,000
nvestment in forward 4,000
Eorei#n currency 1%4,000
nvestment in forward %,000
ash 1%,000
nventory 1%4,000
Eorei#n currency 1%4,000
c.ost of #oods sold 1%,000
nventory 1%4,000
ther comprehensive income %,000
©Cambridge Business Publishers, 2010
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11. To!ic" #a$uation o% %or&ard contracts+ (edging entriesL '+ 0+ )A U.S. company enters into the followin# forward contracts on cto(er 1, %011
1. A#reement to sell 100,000,000 yen on Canuary 1, %01% at $0.00""%. A#reement to (uy 1,000,000 new she2els on Ee(ruary 1, %01% at $0.%%1
Eorward and spot rates for yen and she2els are as follows
S!ot rate%or yen
For&ard rate%or -4-24-,
de$i.ery o% yen
S!ot rate%or ne&s(e3e$s
For&ard rate
%or ,4-24-,de$i.ery o% ne&
s(e3e$s
cto(er 1, %011 $ .00" $ .00"" $.%%0 $ .%%1
3ecem(er *1,%011 .00"4 .00" .%%% .%19
!he company's accountin# year ends 3ecem(er *1.
Required a. &ow are the forward contracts valued on the company's 3ecem(er *1, %011
(alance sheet) Eor each contract, specify the amount and whether it is a currentasset or a current lia(ility.
(. Assume that the forward contract to sell yen is an effective hed#e of a 100,000,000yen forecasted sale to customers in Capan. Ba2e the ad@ustin# entry for thiscontract at 3ecem(er *1, %011.
c. Assume the forward contract to (uy new she2els is an effective hed#e of a1,000,000 new she2el o(li#ation currently on the company's (oo2s. Ba2e thead@ustin# entry for this contract at 3ecem(er *1, %011.
A+S
a. Eorward sale in yen -$.00"" $.00" 100,000,000 $*0,000 current assetEorward purchase in new she2els -$.%%1 $.%19 1,000,000 $%,000 currentlia(ility
(.
nvestment in forward *0,000
ther comprehensive income *0,000
c.
Gchan#e loss %,000nvestment in forward %,000
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1%. To!ic" Hedge o% %ir1 co11it1entL 2n Barch 1, %011, a U.S. company issued a purchase order to a supplier in the aymanslands for #oods with a price of LM3 ,000,000. !he #oods will (e delivered Culy 1,%011, and payment will (e made on Septem(er 1, %011. n Barch 1, %011, the company purchased LM3 ,000,000 for delivery Septem(er 1, %011. !he forward contract is an
effective hed#e of the firm commitment to purchase #oods from the ayman slands. !he#oods are delivered as epected on Culy 1, and the company follows throu#h on theforward contract and ma2es the payment to the supplier on Septem(er 1. !he company'saccountin# year ends on 3ecem(er *1.
Spot and forward rates are as follows -$/LM3
S!ot RateFor&ard rate %or de$i.ery
on Se!te1
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1*. To!ic" For&ard !urc(ase+ cas( %$o& (edge t(at
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Ad@ustin# entries at 3ecem(er *1, %01%
nvestment in forward 4,000
ther comprehensive income 4,000
!o record increase in value of forward contract -$.1%8 to $.1*1
Gchan#e loss %,000
Eirm commitment %,000
!o record loss on firm commitment -$.1%9 to $.1*1
ther comprehensive income %,000
Gchan#e #ain %,000
!o reclassify other comprehensive income to income to match a#ainst loss on firmcommitment.
Barch 1, %01*
nvestment in forward 00ther comprehensive income 00
!o mar2 the forward to mar2et -$.1*1 to $.1*1
Gchan#e loss 00
Eirm commitment 00
!o mar2 the firm commitment to mar2et -$.1*1 to $.1*1
ther comprehensive income 00
Gchan#e #ain 00
!o reclassify other comprehensive income to income to match a#ainst firm commitment
loss.
nventory 1%",00
Eirm commitment %,00
Accounts paya(le 1*1,000
!o record delivery of merchandise, ad@usted for firm commitment (alance.
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Bay 1, %01*
nvestment in forward 00
ther comprehensive income 00
!o mar2 the forward to mar2et -$.1*1 to $.1*%
Gchan#e loss 1,000
Accounts paya(le 1,000!o mar2 accounts paya(le to mar2et -$.1*1 to $.1*%
ther comprehensive income 1,000
Gchan#e #ain 1,000
!o reclassify other comprehensive income to income to match a#ainst accounts paya(leloss.
Eorei#n currency 1*%,000
nvestment in forward ,000
ash 1%8,000
!o close forward contract.
Accounts paya(le 1*%,000
Eorei#n currency 1*%,000
!o pay the supplier.
Bay *1, %01*
ost of #oods sold 1%8,000
ther comprehensive income 1,00
nventory 1%",00
+ote Iemainin# other comprehensive income (alance is $4,000 $%,000 > $00 $00 >
$00 $1,000 $1,00 #ain.
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14. To!ic" Cas( %$o& (edge accounting .ersus regu$ar accountingL '+ )Eollowin# is information on echan#e rates for the euro
S!ot rate For&ard rate %or 04'*4-, de$i.ery
cto(er 1, %011 $1.4 $1.4"
3ecem(er *1, %011 1.0 1.*Canuary *1, %01% 1.% 1.
Barch *1, %01% 1. 1."
April *0, %01% 1.0 1.0
n cto(er 1, %011, a U.S. company forecasts that it will (uy merchandise from asupplier in Dortu#al for :10,000,000 around the end of Barch, %01%, with paymentepected to (e made, in euros, a(out one month later. !he company closes its (oo2s on3ecem(er *1. !he followin# events occur
1. cto(er 1, %011 !he company enters a forward purchase a#reement for delivery
of €10,000,000 on April *0, %01%. +o initial investment is re6uired.%. 3ecem(er *1, %011 !he company closes its (oo2s.*. Canuary *1, %01% !he company issues a purchase order to the supplier for
€10,000,000 in merchandise, to (e delivered Barch *1, %01%.4. Barch *1, %01% !he company ta2es delivery of the merchandise.. April *0, %01% !he company closes the forward contract and pays the supplier
€10,000,000.. Bay 1, %01% !he company sells the merchandise to a U.S. customer for
$%%,00,000.
Required Eill in the schedule (elow, showin# the amounts related to the a(ove events that will (ereported in the company's annual reports for %011 and %01%. Show related @ournal entriesin the net schedule. Show lia(ilities and #ains in parenthesis.
©Cambridge Business Publishers, 2010
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Account tit$e
For&ard contract 8ua$i%ies as a(edge o% t(e %orecasted
transaction
T(e %or&ard contract does not
8ua$i%y as a (edge
,*-- ,*-, ,*-- ,*-,
nvestment in forward-(alance sheet
$ 00,000 $ 00,000
ther comprehensiveincome -5alance sheet
-00,000
-
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For&ard contract is a 8ua$i%ied (edge3ecem(er *1nvestment in forward 00,000 00,000
For&ard contract is not a 8ua$i%ied (edge
nvestment in forward 00,000 Gchan#e #ain 00,000
Canuary *1nvestment in forward %00,000 %00,000
Barch *1nvestment in forward *00,000 *00,000Gchan#e loss *00,000
Eirm commitment *00,000 *00,000
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1. To!ic" Cas( %$o& (edge accounting .ersus regu$ar accountingL '+ )Eollowin# are echan#e rates for the anadian dollar.
S!ot rate
For&ard rate %or Marc( '-+
,*-, de$i.ery
cto(er *1, %011 $ 0."0 $ 0."13ecem(er *1, %011 0."4 0."Barch *1, %01% 0."% 0."%
A U.S. company enters a forward contract on cto(er *1, %011 to hed#e a forecasted purchase of merchandise for $1,000,000 on Barch *1, %01%. n Barch *1 it ta2esdelivery of the merchandise, closes the forward and pays for the merchandise. t sells themerchandise in Bay. !he company's accountin# year ends 3ecem(er *1.
Required ;hat are the (alances for the followin# accounts, assumin# the forward contract 6ualifies
as a hed#e of the forecasted transaction for the period cto(er *1, %011 to Barch *1,%01%, and also if the forward contract does not 6ualify as a hed#e)
a. ther comprehensive income (alance, 3ecem(er *1, %011 (.
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1. To!ic" Hedge o% %ir1 co11it1ent+ i1!ort transaction+ s!ecu$ationL ,+ 2+ 7Glectronic mporters, a U.S. company, has the followin# outstandin# (alances as of3ecem(er *1, %011, its accountin# yearend.
For&ard !urc(ase contract dated 3ecem(er 1, %011 for %0,000,000 yen to hed#e a firm
commitment to purchase computer hardware for %0,000,000 yen in 90 days endin# onBarch 1, %01%.
Account !aya
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a. Eorward purchase contract no income effect due to offsettin# #ain and loss oncontract and firm commitment.
Accounts paya(le 80,000,000 -$.0010 $.0000 $8,000 #ain
Eorward sale *0,000,000 -$.0000 $.009 1,00 #ain$",00 #ain
(. Eorward purchase contract-$.00* $.000* %0,000,000 $,400 current lia(ility
Eorward sale contract-$.00 $.009 *0,000,000 $1,00 current asset
c.
-$.00" %0,000,000 $11,000Dlus firm commitment (alance-$.00* $.00" %0,000,000 10,000&ardware (alance, */1/1% $1%,000
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18. To!ic" I1!ort transactions+ (edge o% %ir1 co11it1ent+ (edge o% %orecastedtransaction+ s!ecu$ationL ,+ 2+ )+ 7Gach of the followin# situations is independent of the others. Acme mporters is a U.S.company with a 3ecem(er *1 yearend. Use the followin# information on echan#e rates-US$/$anadian to answer each 6uestion.
S!ot rate
For&ard rate%or de$i.ery on
,4-4-'
Septem(er 1, %01% $."0 $."%
cto(er 1, %01% .8" .893ecem(er *1, %01% .8 .84Ee(ruary 1, %01* .9 .9
Required Eor each situation, -1 ma2e the @ournal entries necessary to record the events, includin#
yearend ad@ustments, and -% calculate the effect on AcmeFs income in the year %01%, andin the year %01*. Show the amounts and whether they are #ains or losses.
a. n Septem(er 1, %01% Acme mporters a#rees to (uy merchandise from BontrealSuppliers. 3elivery will ta2e place on cto(er 1, %01%, and Acme will payBontreal Suppliers $,000 on Ee(ruary 1, %01*.
(. n Septem(er 1, %01%, Acme mporters ma2es a firm commitment to (uymerchandise from Bontreal Suppliers. 3elivery will ta2e place on cto(er 1,%01%, and Acme will pay Bontreal Suppliers $,000 on Ee(ruary 1, %01*. ncto(er 1, %01%, Acme enters into a forward purchase contract with A5Gchan#e 3ealers for the purchase of $,000, to (e delivered Ee(ruary 1, %01*.
c. n Septem(er 1, %01%, Acme mporters ma2es a firm commitment to (uymerchandise from Bontreal Suppliers. 3elivery will ta2e place on cto(er 1,%01%, and Acme will pay Bontreal Suppliers $,000 on Ee(ruary 1, %01*. nSeptem(er 1, %01%, Acme enters into a forward purchase contract with A5Gchan#e 3ealers for the purchase of $,000, to (e delivered Ee(ruary 1, %01*.!he merchandise remains in AcmeFs inventory as of 3ecem(er *1, %01*.
d. !he E at Acme mporters (elieves that the U.S. dollar will continue tostren#then with respect to the anadian dollar. n cto(er 1, %01%, he enters intoa speculative forward sale contract with A5 Gchan#e 3ealers for delivery of$,000 on Ee(ruary 1, %01*.
e. n Septem(er 1, %01%, Acme mporters forecasts that it will (uy merchandisefrom a anadian supplier. 3elivery and payment of $,000 is epected to ta2e
place on cto(er 1, %01%. n Septem(er 1, %01%, Acme enters into a forward purchase contract with A5 Gchan#e 3ealers for the purchase of $,000 for$0.8, to (e delivered cto(er 1, %01%. !he merchandise purchase occurs asforecasted, and the merchandise remains in Acme's inventory as of 3ecem(er *1,%01*.
©Cambridge Business Publishers, 2010
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1a.10/1 Berchandise *,900
Accounts paya(le *,900
-,000 $.8"
1%/*110/1
Accounts paya(le 10
Gchan#e #ain 10
J-$.8" $.8 ,000K
%/1 Accounts paya(le *00Gchan#e #ain *00
J-$.8 $.9 ,000K
%/1 Accounts paya(le *,40ash *,40
-,000 $.9 (.
10/1 Berchandise *,900Accounts paya(le *,900
1%/*1 Accounts paya(le 10Gchan#e #ain 10
1%/*1 Gchan#e loss %0
nvestment in forward %0J-$.89 $.84 ,000K
%/1 Accounts paya(le *00Gchan#e #ain *00
%/1 Gchan#e loss %0nvestment in forward %0
J-$.84 $.9 ,000K
%/1 Eorei#n currency *,40
nvestment in forward 00ash *,90
%/1 Accounts paya(le *,40Eorei#n currency *,40
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c.10/1 Gchan#e loss 10
nvestment in forward 10
J-$."% $.89 ,000K
10/1 Eirm commitment 10
Gchan#e #ain 10
10/1 Berchandise *,900Accounts paya(le *,900
10/1 Berchandise 10Eirm commitment 10
1%/*1 Gchan#e loss %0
nvestment in forward %0
1%/*1 Accounts paya(le 10Gchan#e #ain 10
%/1 Gchan#e loss %0nvestment in forward %0
%/1Accounts paya(le *00
Gchan#e #ain *00
%/1%/1
Eorei#n currency *,40
nvestment in forward 00ash *,90
%/1Accounts paya(le *,40
Eorei#n currency *,40
©Cambridge Business Publishers, 2010
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d.1%/*1 nvestment in forward %0
Gchan#e #ain %0
J-$.89 $.84 ,000K
%/1 nvestment in forward %0
Gchan#e #ain %0J-$.84 $.9 ,000K
%/1 Eorei#n currency *,40ash *,40
%/1ash *,90
Eorei#n currency *,40nvestment in forward 00
e.
10/1 nvestment in forward 100ther comprehensiveincome 100
J-$.8".8 ,000K
10/1 Eorei#n currency *,900
nvestment in forward 100ash *,"00
10/1Berchandise *,900
Eorei#n currency *,900
%. Income efects:%01% %01*
-a $10 #ain $*00 #ain
-( 100 loss 0 #ain-c 100 loss 0 #ain-d %0 #ain %0 #ain-e 0 0
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1". To!ic" Borro&ing in %oreign currencyL ,A U.S. company purchases a 0day certificate of deposit from a
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19. To!ic" S!ecu$ation in %or&ard contractsL 7n +ovem(er 1, %01*, a U.S. company thin2s the echan#e rate for the euro will fall, so itenters into a forward contract in the amount of :1,000,000, for delivery on Barch 1,%014. !his is a speculative contract. !he company's accountin# year ends 3ecem(er *1.!he company closes the contract on Ee(ruary 1, %014. Gchan#e rates are as follows -$/
:
S!ot rateFor&ard rate %or
Marc( -2+ ,*-0 de$i.ery
+ovem(er 1, %01* $ 1.4% $ 1.4*3ecem(er *1, %01* 1.4 1.4Ee(ruary 1, %014 1.48 1.4"
Barch 1, %014 1.0 1.0
Required a. 3oes the company enter a forward purchase or a forward sale contract) Gplain. (. Drepare the @ournal entries necessary on 3ecem(er *1, %01* and Ee(ruary 1, %014
to record the a(ove events.
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a. A forward sale loc2s in the sellin# price. f the rate falls, as the company epects,it will #ain (y (uyin# euros at the lower price and sellin# at the hi#her contract price.
(. 3ecem(er *1, %01*
=oss %0,000
nvestment in forward %0,000
!o ad@ust the forward contract to fair valueH $%0,000 -$1.4 $1.4* :1,000,000.
Ee(ruary 1, %014
=oss *0,000
nvestment in forward *0,000
!o ad@ust the forward contract to fair valueH $*0,000 -$1.4" $1.4 :1,000,000.
!he company closes the forward (y enterin# a forward purchase for delivery on Barch 1,%014, at $1.4"/:. So the company sells at $1.4* and (uys at $1.4", for a net cash outflow
of -$1.4" $1.4* :1,000,000 $0,000.
nvestment in forward 0,000
ash 0,000
!o close the forward contract on Ee(ruary 1, %014.
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%0. To!ic" IFRS %or (edging %orecasted transactionsL ;n Ee(ruary 1, %011, an talian company, with a Cune *0 yearend, enters a forward purchase contract for $1,000,000 to (e delivered on Au#ust 1, %011. !he contract hed#esa forecasted purchase of e6uipment. !he forward is closed and the e6uipment purchased
on Au#ust 1. !he e6uipment has a %year life, and is strai#htline depreciated. Eollowin#is information on echan#e rates -:/$
S!ot rateFor&ard rate %or August -+
,*-- de$i.ery
Ee(ruary 1, %011 €0."0 €0."1Cune *0, %011 0.84 0.8
Au#ust 1, %011 0.8% 0.8%
!he company follows EIS and uses the (asis ad@ustment approach to reportin# cash flowhed#es.
Required Drepare the @ournal entries to record the followin# events
a. Cune *0, %011 ad@ustin# entry (. Au#ust 1, %011 ad@ustin# entries and transactionsc. Cune *0, %01% ad@ustin# entry for the e6uipmentd. f the company followed U.S.
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a. Cune *0, %011
ther comprehensive income 0,000
nvestment in forward 0,000
!o ad@ust the forward contract to fair valueH :0,000 -:."1 :.8 $1,000,000.
(. Au#ust 1, %011
ther comprehensive income 40,000
nvestment in forward 40,000
!o ad@ust the forward contract to fair valueH :40,000 -:.8 :.8% $1,000,000.
Eorei#n currency 8%0,000
nvestment in forward 90,000
ash "10,000
!o close the forward contract.
G6uipment 8%0,000Eorei#n currency 8%0,000
!o purchase the e6uipment.
G6uipment 90,000
ther comprehensive income 90,000
!o ad@ust the e6uipment for the accumulated loss on the forward.
c. Cune *0, %01%
3epreciation epense *81,%0
G6uipment, net *81,%0
!o record depreciation epense for fiscal %01%H :*81,%0 -:"10,000/% 11/1%.
d. Cune *0, %01%
3epreciation epense **0,000
G6uipment, net **0,000
!o record depreciation epense for fiscal %01%H :**0,000 -:8%0,000/% 11/1%.
3epreciation epense 41,%0
ther comprehensive income 41,%0
!o reclassify other comprehensive income as an ad@ustment of depreciationepense for fiscal %01%H :41,%0 -:90,000/% 11/1%.
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