Advanced Accounting Chapter 11 Solution Manual

Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

CHAPTER 11 MULTINATIONAL ACCOUNTING: FOREIGN CURRENCY TRANSACTIONS AND FINANCIAL INSTRUMENTS ANSWERS TO QUESTIONS Q11-1 Indirect and direct exchange rates differ by which currency is desired to be

expres expressed sed in anothe anotherr curren currency cy.. An indire indirect ct excha exchange nge rate rate is the number number of foreig foreign n currency units that may be obtained for one local currency unit. The indirect exchange rate has the foreign currency unit in the numerator. As a fraction, the indirect exchange rate is expressed as follows: Number of foreign currency units One local currency unit A direct exchange rate is the number of local currency units needed to acquire one foreign currency unit. The direct exchange rate has the local currency units in the numerator the !.". dollar for the direct exchange rate for the !.". dollar#. As a fraction, the direct exchange rate is expressed as follows: Number of local currency units One foreign currency unit The indirect and direct exchange rates are in$ersely related and both state the same relationship between two currencies. Q11-2 The direct exchange rate can be calculated by ta%ing the in$erse of the indirect

exchange rate. "uch a computation follows: Number of foreign currency units One local currency unit

&

'().*+* 'anadian dollars# ().-- !.". dollars#

The in$erse of the indirect exchange rate is: ().-- !.". dollars# dollar s# '().*+ 'anadian dollars#

&

(-.*/-

Q11-3 0hen the !.". dollar strengthens against the 1uropean euro, imports from

1urope into the !.". will be less expensi$e in !.". dollars. The direct exchange rate decreases, indicating that it ta%es fewer dollars to acquire 1uropean euros. Q11-4 A foreign transaction is a transaction that does not in$ol$e the exchange of

currencies on the part of the reporting entity. An example of a foreign transaction is the sale of equipment by a !.". company the reporting entity# to a 2apanese firm that is denominated in !.". dollars. A foreign currency transaction is a transaction that does in$ol$e the exchange of curr curren enci cies es on the the part part of the the repo report rtin ing g enti entity ty.. An exam exampl ple e of a fore foreig ign n curre currenc ncy y transaction is the sale of equipment by a !.". company the reporting entity# to a 2apanese firm that is denominated in 2apanese yen.

11-1


Q11-5 There are many types of economic factors that affect currency exchange rates,

among which are the le$el of inflation, the balance of payments, changes in interest rates and in$estment le$els, and the stability and process of go$ernance. One example of an economic factor that results in a wea%ening of the !.". dollar $ersus the 1uropean euro is a higher le$el of inflation in the !.". relati$e to the inflation in 1urope. Q11-6 Assets and liabilities denominated in a foreign currency are measured according to the requirement requirements s in FASB 52 (ASC 3!" for those arising from normal purchase and sale sale transa transacti ctions ons,, and by FASB 133 (ASC 15" for forward exchange contracts and hedging hedging acti$ities acti$ities.. FASB 52 (ASC 3!" specifies that the $aluation at the transaction

date and each subsequent balance sheet date should be at the local currency equi$alent using the spot rate of exchange. 3orward exchange contracts are $alued at fair $alue, typically by using the forward rate for the remainder of the term of the forward contract. Q11-# 3oreign currency transaction gains or losses are recogni4ed in the financial

statements in the period in which the exchange rate changes. These gains or losses are reported on the income statement. Q11- If the direct exchange rate increases, the "un 'ompany will experience a foreign

curren currency cy transa transacti ction on loss loss on its (--,(--,---- accoun accountt payabl payable e that that is denomi denominat nated ed in 'anadian dollars. The increase in the direct exchange rate shows that the !.". dollar has wea%ened relati$e to the 'anadian dollar, requiring more !.". dollars be used to pay the debt owed. Q11-$ 3our ways a !.". company can manage the ris% of changes in the exchange

rates for foreign currencies are to )# use a forward contract to offset an exposed foreign currency currency position, # hedge a firm foreign currency currency commitmen commitmentt as a fair $alue hedge, *# hedge an anticipated foreign transaction as a cash flow hedge, or /# speculate in foreign currency mar%ets. One example of a !.". company hedging against the ris% of changes in the exchange rates for foreign currencies is to use a forward exchange recei$able contract to partially offset the effects of changes in the exchange rates of the foreign currency liability. Q11-1! An exposed net asset position occurs when a company5s trade recei$ables and

othe otherr asse assets ts deno denomi mina nate ted d in a fore foreig ign n curr curren ency cy are are great greater er than than its its liab liabililit itie ies s denominated in that currency. An exposed net liability position occurs if a company5s liabilities denominated in a foreign currency exceed recei$ables denominated in that currency. Q11-11 A difference usually exists between a currency5s spot rate and forward rate

because of the different economic factors in$ol$ed in the determination of a future $ers $ersus us pres presen entt rate rate of exch exchan ange ge.. This This diff differe erenc nce e is usua usualllly y posi positi ti$e $e beca becaus use e of uncertainty and conser$atism toward the future. 3or example, if inflation is assumed to continue into the future in the foreign country whose currency is being acquired, the forward rate will be higher than the spot rate because of the decreasing purchasing power of the currency. In addition, the time $alue of money factor will typically result in a higher forward exchange rate than the spot exchange rate.

11-2


Q11-12 a# 0hen an exposed foreign currency position exists, either an exposed net

asset or net liability position is created. The forward contract is $alued at fair $alue, usually by the forward exchange rate for the remainder of the term of the forward contract. contract. The underlying underlying payable or recei$able recei$able from the foreign currency transaction transaction is $alued at the spot rate at the time of the transaction and ad6usted to the current spot rate at each each bala balanc nce e shee sheett date date.. b# b# 3or 3or a hedg hedge e of an iden identi tifi fiab able le forei foreign gn curr curren ency cy commitment, both the financial instrument and the forward contract aspects of the hedge are $alued at the forward forward rate. An account, account, termed termed firm commitment, commitment, is created created during the term of the forward forward contract contract to recogn recogni4e i4e the change change in $alue $alue of the financia financiall instrument aspect of the firm commitment. c# 3or a cash flow hedge of a forecasted transaction, the forward contract is $alued at the forward rate, but the effecti$e portion of the change in the fair $alue of the forward contract is recogni4ed in other comprehensi$e income. The gain or loss on the re7measured foreign currency denominated account payable or recei$able is offset from a reclassification of other comprehensi$e income so that there is no net exchange gain or loss from this hedge. d# A speculati$e forward contract is not a hedge, but rather is a deri$ati$e that is $alued at fair $alue by using the forward exchange rate for the remainder of the forward contract8s term. 9ains or losses on these forward contracts are recogni4ed in income in the period in which they occur. Q11-13 a. A foreig foreign n currency recei$abl recei$able e from bro%er would be shown shown on the balance balance

sheet for the period $alued at its fair $alue by using the contracted amount of foreign currency multiplied by the forward rate. b. A foreign currency currency transactio transaction n loss would be shown shown on the income income statement statement at the end of the period as a separate item in the Other category. c. A foreign currency transaction gain would be shown on the income statement at the end of the period as a separate item in the Other category. d. A payable to exchange bro%er would be shown on the balance sheet for the period $alued at the contracted amount of foreign currency multiplied by the forward exchange rate. This is the dollar amount agreed upon by the forward contract and will not change during the term of the forward contract. e. A premium on forward contract is not separately accounted for but rather is indirectly included in the gain or loss through the process of re$aluing the forward contract from its forward rate at the time the contract is entered into to its e$entual fair $alue using the spot rate at the maturity date of the forward contract. f. 3oreign currency units will be shown on a !.". company5s balance sheet as an in$estment in$estment at their !.". dollar equi$alent equi$alent $alue as of the balance balance sheet date. The !.". dollar equi$alent $alue is determined using the spot rate at each balance sheet date. g. Accounts payable denominated in a foreign currency would be shown on the balance sheet for the period at the contracted amount of foreign currency multiplied by the current exchange rate. Note that FASB 52 (ASC 3!" requires that the spot rate be used for foreign currency7denominated payables or recei$ables arising from normal operating transactions, but that FASB 133 (ASC 15" requires that forward exchange contracts be $alued using the forward rate.

11-3


SOLUTIONS TO CASES C11-1 E%%&') *% C+,./. E0'+,.& R,&)

a. The ma6or factors influencing the demand for the !.". dollar on the foreign exchange mar%ets are )# rate of inflation, # the interest and in$estment rates, *# balance of payments, and /# alternati$e in$estment opportunities. 3or example, the demand for the !.". dollar wea%ens as inflation rates increase, interest rates decrease, the balance of payments becomes an increasingly high deficit, and alternati$e in$estments in other countries are more readily a$ailable. b. As the dollar drops in $alue in relation to other currencies: )# 1xports from the !.". to the other country become less expensi$e and foreign buyers tend to increase their orders for !.". goods. 3or example, assume the !.". dollar wea%ened relati$e to a foreign currency unit 3'!# as follows: direct exchange rate after wea%ening

& &

(-.;- < ) 3'! (-.+- < ) 3'!

This would mean that a !.".7manufactured machine selling for ()-,--- would cost the foreign customer -,--- 3'! before the wea%ening of the dollar ()-,--- & -,--- 3'! x (-.;-#. After the wea%ening of the dollar, this same machine would cost the foreign customer )+,++ 3'! ()-,--- & )+,++ 3'! x (-.+-#. This means a significant price reduction for the foreign buyer, thereby increasing the foreign demand for the !.".7manufactured machine. # The opposite effect occurs for the !.". business firm as the dollar wea%ens. 3oreign7made goods are now more expensi$e as it ta%es more dollars to acquire imports. 3or example, a foreign7made part selling for )- 3'! before the wea%ening costs the !.". company (;.-- (;.-- & )- 3'! x (-.;-#. After the dollar wea%ens, the same part now costs the !.". company (+.-- (+.-- & )- 3'! x (-.+-#. This increase of ().-- per part is due solely to the wea%ening of the !.". dollar relati$e to the foreign currency. Ne$ertheless, the !.". business firm is sub6ect to a $ery significant increase in the cost of its inputs. c. As the dollar wea%ens, imports become more expensi$e for the !.". consumer. In addition, as in case b# abo$e, the !.".7based manufacturer using foreign7made components for its products must now pass the higher costs on to its customers. Thus, !.". consumers ha$e to pay higher prices for their goods that ha$e foreign elements.

11-4


C11-2

R&*/. , F*&/. C&' T,),'/* * +& F/,'/, S,&&) 7AICPA A8,&89

a. =ow should report a foreign exchange loss on its ->; income statement. This loss is calculated by ta%ing the number of pounds that are due in ->+ and multiplying them by the change in the direct exchange rate from the transaction date to the balance sheet date. "ince the !.". dollar wea%ened, the direct exchange rate on ?ecember *), ->;, would be higher than the direct exchange rate on No$ember *-, ->;. The increase in the direct exchange rate means that more !.". dollars would be needed to purchase pounds at ?ecember *), ->;, than at No$ember *-, ->;. Therefore, a foreign currency transaction loss should be reported in ->; because the exchange rate changed during ->;. In addition, the accounts payable denominated in pounds should be reported at the exchange rate at ?ecember *), ->;. This means that the accounts payable recorded on No$ember *-, ->;, would ha$e to be increased in order to reflect a wea%ening !.". dollar. b. @eporting a foreign exchange loss in ->; is appropriate because, consistent with accrual accounting, the exchange rate on ?ecember *), ->;, should be used to $alue the accounts payable denominated in pounds. =ow5s beliefs as to future exchange rate mo$ements are excluded from the financial statements. C11-3 C+,./. E0'+,.& R,&)

Note to Teacher: 'urrency exchange rates may be found in a $ariety of places on the Internet. A good site is http:<
11-5


C11-3 continued#

1uropean 1uro:

=ritish Eound:

11-


C11-3 continued#

Fexican Eeso:

11-!


C11-4 A''*/. %* F*&/. C&'-D&*/,&8 A''*) P,,&

F1FO TO:

Farie Gamont, Fanager, Fardi 9ras audit

3rom:

HHHHHHHHHHHHHH HHHHHHHHHHHHHHH, 'EA

@e:

Fardi 9ras 'orporation8s 3oreign 'urrency Transactions

Our client, Fardi 9ras 'orporation, needs to change its method of accounting for the effects of changes in the exchange rate for "wiss francs. 'urrently, any difference between the liability recorded when the merchandise is recei$ed and the amount that is paid in !.". dollars# when the liability is settled is recorded by our client as an ad6ustment to the cost of the in$entory purchased. owe$er, this difference is the result of changes in the exchange rate for "wiss francs between the date of the in$entory purchase and the payment date and is not the result of changes in the price of the merchandise. Fardi 9ras8s purchases from the "wiss company are foreign currency transactions that result in Fardi 9ras recording a payable denominated in "wiss francs. The liability is fixed in terms of the amount of "wiss francs that must be paid. Fardi 9ras is recording the payable appropriately since they are using the exchange rate on the date of the in$entory purchase to con$ert the francs to dollars. This is consistent with requirements in FASB S,&& N*; 52 (ASC 3!". owe$er, the accounting for subsequent changes in the !.". dollar equi$alent of the "wiss franc liability is not acceptable. @ather than an ad6ustment to the cost of in$entory, changes in the liability that result because of changes in the exchange rate between the !.". dollar and the "wiss franc must be recogni4ed as a foreign currency transaction gain or loss and must be included in net income in the period in which the rate change occurs. Fardi 9ras should also be aware that any outstanding foreign currency payables at the balance sheet date should be ad6usted to their !.". dollar equi$alent using the exchange rate in effect on the balance sheet date, with any resulting foreign currency transaction gains or losses included in earnings of the current period. ?isclosure of the aggregate gain or loss from foreign currency transactions used in determining net income for a gi$en period is also required. Authoritati$e support for the abo$e memo can be found in the following references: 3A"= ;, Ear. );, Ear. )+, and Ear. *- A"' J*-#

11-"


C11-5 A''*/. %* F*&/. C&' F*<,8 C*,')

F1FO To:

Gindsay 0illiams, Treasurer

3rom:

HHHHHHHHHH HHHHHHHHHHH, 'EA, Assistant Treasurer

@e:

3inancial "tatement 1ffects of 3oreign 'urrency 3orward 'ontract

A$anti has entered into a contract to purchase equipment for a fixed price of /.; million euros. This agreement meets the definition of an unrecogni4ed firm commitment that has both contractual rights and contractual obligations. The fixed price of the firm commitment exposes the company to the fair $alue ris% of changes in the price of the equipment. owe$er, because the purchase price is denominated in euros, the contract also exposes the company to the ris% of changes in the $alue of the foreign currency. The company may enter into a deri$ati$e contract. FASB S,&& N*; 133 (ASC 15" allows such a deri$ati$e contract of a foreign currency exposure of an unrecogni4ed firm commitment to be designated as a hedge. If A$anti elects to use a forward exchange contract to fix the exchange rate to purchase euros, the company can designate the forward contract as a foreign currency fair $alue hedge of the foreign currency exposure in the firm commitment if there is formal documentation of the hedging relationship and the rationale for the management8s decision to use the hedge, and if the effecti$eness of the hedge is assessed before e$ery reporting date and at least e$ery three months. If the forward contract qualifies as a foreign currency fair $alue hedge, the gain or loss on the hedge and the offsetting gain or loss on the hedged firm commitment should be recogni4ed in earnings in the same accounting period. Therefore, during the commitment period, there will be no effect on the income statement the gain or loss on the deri$ati$e will be offset by the loss or gain on the firm commitment. After the equipment is deli$ered, a foreign currency denominated payable will be recorded and accounted for under FASB S,&& N*; 52 (ASC 3!" . Transaction gains or losses on the foreign currency liability may continue to be offset by changes in the fair $alue of the forward contract. Authoritati$e support for the memo can be found in the following references: 3A"= )**, Ear. /, Ear. / footnote#, 3A"= )**, Ear. )Jd#, and 3A"= )**, Ear. - A"' J);#

11-#


C11-6 A''*/. %* H&8.&) *% A=,/,&-%*-S,& S&'//&)

F1FO To:

Far% =ec%er, '3O

3rom:

HHHHHHHHHHH HHHHHHHHHHHHHHH, 'EA, In$estment ?i$ision

@e:

edge AccountingK=ond Eortfolio

The proposal has been made to use an interest rate futures contract to hedge the interest rate ris% associated with @ainy ?ay8s portfolio of bond in$estments. Although the use of the deri$ati$e may be expected to offset the changes in the $alue of the bond portfolio, the issue that must be considered is whether the use of this deri$ati$e would qualify for hedge accounting under FASB S,&& N*; 133 (ASC 15". If hedge accounting cannot be used, the changes in the fair $alue of the futures contract will be included in net income. owe$er, the changes in the fair $alue of the bond portfolio will continue to be reported as other comprehensi$e income, but not in net income. FASB 133 (ASC 15" does allow a portfolio of similar assets or similar liabilities to be

designated as the hedged item under certain conditions. The change in $alue of any item in the portfolio must be generally proportionate to changes in $alue for the entire portfolio. To meet this condition, @ainy ?ay should be able to demonstrate that the $alues of the indi$idual bonds within the portfolio respond to interest rate changes in a proportionate manner to the o$erall portfolio response. 9i$en the wide range of maturity dates on the bonds in the portfolio, this condition may be difficult to meet. If the aggregation criteria are not met, @ainy ?ay could consider aggregating bonds of similar maturities into se$eral sub7portfolios and using multiple deri$ati$es to hedge the interest rate ris% associated with each group of bond in$estments. This subdi$iding of the bond portfolio would also ma%e it easier to demonstrate if the hedge is effecti$e. If hedge accounting is allowed, the effect on earnings of the deri$ati$e will be offset by the changes in the fair $alue of the bond in$estment. Authoritati$e support for the abo$e memo can be found in the following references: 3A"= )**, Ear. )J, Ear. -, Ear. ), Ear, * A"' J);# 3A"= ));, Ear. )*, amended by 3A"= )*-, Ear. * A"' *-#

11-1$


SOLUTIONS TO E>ERCISES E11-1 E0'+,.& R,&)

a. Indirect exchange rates for pounds and dollars: ().-- & .+; =ritish pounds ) pound < ().+-# ().-- & ).*;)/ 'anadian dollars ) 'anadian dollar < (-./# b.

3'!

&

( ?irect 1xchange @ate

&

(J,--().+-

&

;,--- =ritish pounds

c. /,--- 'anadian dollars x (-./ & (,L+-

E11-2 C+,.&) / E0'+,.& R,&)

a. 1xchange rates: Arri$al ?ate

?irect 1xchange @ate

Indirect 1xchange @ate

b.

?eparture ?ate

) florin & (-.-

) florin & (-.);

(-- < ),--- florins#

(); < )-- florins#

().-- & ; florins

().-- & +.+ florins

),--- florins < (--#

)-- florins < ();#

The direct exchange rate has decreased. This means that the dollar has strengthened during Fr. Alt5s $isit. 3or example, upon arri$al, Fr. Alt had to pay (-.- per each florin. !pon departure, howe$er, each florin is worth 6ust (-.);. This means that the relati$e $alue of the dollar has increased or, alternati$ely, the $alue of the florin has decreased.

c. The !.". dollar equi$alent $alues for the )-- florins are: Arri$al date )-- florins x (-.- & ?eparture date )-- florins x (-.); & 3oreign 'urrency Transaction Goss

(); (;

Fr. Alt held florins for a time in which the florin was wea%ening against the dollar. Thus, Fr. Alt experienced a loss by holding the wea%er currency.

11-11


E11-3 B,)/' U8&),8/. *% F*&/. E0*)&

a. If the direct exchange rate increases, the !.". dollar wea%ens relati$e to the foreign currency unit. If the indirect exchange rate increases, the !.". dollar strengthens relati$e to the foreign currency unit. b. Transaction

"ettlement 'urrency

Importing Importing 1xporting 1xporting

?ollar G'! ?ollar G'!

?irect 1xchange @ate Increases ?ecreases NA G NA 9

NA 9 NA G

11-12

Indirect 1xchange @ate Increases ?ecreases NA 9 NA G

NA G NA 9


E11-4 A''* B,,'&)

3oreign 'urrency !nits M# 3rom recei$able: M;-,--- x (-.;J#

# <)
)/;,---

=al. <
,;--

To payable: M);,--- x (-.;J#

J# <)
,;--

M;-,--x (-.;J 7 (-.+#

;# <)
)-,---

M;-,--- x (-.;J#

# <)
Accounts @ecei$able M# M;-,--- x(-.+-#

)# ))<)
M;-,--- x (-.+ 7 (-.+-#

*# )<*)
M;-,--- x (-.+#

=al. )<*)
M;-,--- x (-.;J#

);-,--;,--);;,---

=al. <)
)/;,---

=al. <
7-7

)/;,---

Accounts Eayable M#

M);,--x (-.;J 7 (-.+# M);,--- x (-.;J#

+# <)
;,--,;--

M);,--- x (-.+-#

# ))<)
M);,--x (-.+ 7 (-.+-#

/# )<*)
M);,--- x (-.+#

=al. )<*)
M);,--- x (-.;J#

=al. <)
;,--,;-,;--

,;-7-7

3oreign 'urrency Transaction Goss M);,--x (-.+ 7 (-.+-#

/# )<*)
M;-,--x (-.;J 7 (-.+#

;# <)
,;-)-,---

3oreign 'urrency Transaction 9ain M;-,--x (-.+ 7 (-.+-#

*# )<*)
;,---

M);,--x (-.;J 7 (-.+#

+# <)
;,---

11-13


E11-5 D&&//. Y&,-E8 A''* B,,'&) %* I* ,8 E0* T,),'/*)

Accounts @ecei$able

Accounts Eayable

3oreign 'urrency Transaction 1xchange Goss

'ase )

NA

()+,---a#

NA

(,---b#

'ase 

(*J,---c#

NA

NA

(,---d#

'ase *

NA

(,---e#

(*,---f#

NA

'ase /

(+,;-g#

NA

(),;-h#

NA

a# b# c# d# e# f# g# h#

G'! /-,--- x (-./G'! /-,--- x (-./- 7 (-./;# G'! -,--- x ().LG'! -,--- x ().L- 7 ().J-# G'! *-,--- x (-.LG'! *-,--- x (-.L- 7 (-.J-# G'! ,;--,--- x (-.--; G'! ,;--,--- x (-.--; 7 (-.--*#

11-14

3oreign 'urrency Transaction 1xchange 9ain


E11-6 T,),'/*)
a.

Fay )

2une -

2uly )

August )-

b.

In$entory or Eurchases# Accounts Eayable 3oreign purchase denominated in !.". dollars.

J,/--

Accounts Eayable 'ash "ettle payable.

J,/--

J,/--

J,/--

Accounts @ecei$able "ales 3oreign sale denominated in !.". dollars.

)-,---

'ash Accounts @ecei$able 'ollect recei$able.

)-,---

)-,---

)-,---

Fay )

In$entory or Eurchases# J,/-Accounts Eayable P# J,/-3oreign purchase denominated in yen: (J,/-- < (-.--- & P),--,---

2une -

3oreign 'urrency Transaction Goss +-Accounts Eayable P# +-@e$alue foreign currency payable to !.". dollar equi$alent $alue: (L,--- & P),--,--- x (-.--; 2une - spot rate 7 J,/-- & P),--,--- x (-.--- Fay ) spot rate ( +-- & P),--,--- x (-.--; 7 (-.---# Accounts Eayable P# 3oreign 'urrency !nits P# "ettle payable denominated in yen.

2uly )

August )-

Accounts @ecei$able =@G# "ales 3oreign sale denominated in =ra4ilian reals: ()-,--- < (-.- & =@G;-,---

L,--L,--)-,--)-,---

Accounts @ecei$able =@G# ),--3oreign 'urrency Transaction 9ain ),--@e$alue foreign currency recei$able to !.". dollar equi$alent $alue: ( )),--- & =@G;-,--- x (-. Aug. )- spot rate 7 )-,--- & =@G;-,--- x (-.- 2uly ) spot rate ( ),--- & =@G;-,--- x (-. 7 (-.-# 3oreign 'urrency !nits =@G# Accounts @ecei$able =@G# @ecei$e =ra4ilian reals in settlement of recei$able.

11-15

)),--)),---


E11-# F*&/. P'+,)& T,),'/*

a.

?enominated in "wiss francs @one Imports reports in !.". dollars )<)<>)

?irect 1xchange @ate b.

)<*)<>)

Transaction ?ate (-.-

=alance "heet ?ate (-.++

?ecember ), ->) In$entory or Eurchases# Accounts Eayable "3r# ()-,;-- & "3r );,--- x (-.-

)-,;--

+-+--

2anuary );, -> 3oreign 'urrency Transaction Goss Accounts Eayable "3r# @e$alue payable to current !.". dollar equi$alent: ()-,-- & "3r );,--- x (-.+J 2an. );, ->, $alue 7 L,L-- & "3r );,--- x (-.++ ?ec. *), ->), $alue ( *-- & "3r );,--- x (-.+J 7 (-.++# Accounts Eayable "3r# 3oreign 'urrency !nits "3r# ()-,-- & "3r );,--- x (-.+J

*-*--

)-,-)-,--

Accounts Eayable "3r# "3r );,--- x (-.-# +-"3r );,--- x (-.++# "3r );,--- x (-.+J#

)<);<> "ettlement

"ettlement ?ate (-.+J )-,;--

?ecember *), ->) Accounts Eayable "3r# 3oreign 'urrency Transaction 9ain @e$alue foreign currency payable to equi$alent !.". dollar $alue: ( L,L-- & "3r );,--- x (-.++ ?ec. *) spot rate 7)-,;-- & "3r );,--- x (-.- ?ec. ) spot rate ( +-- & "3r );,--- x (-.++ 7 (-.-#

A21 )<*)<>)

)<);<>

)<)<>)

)-,;--

=al )<*)<>)

L,L--

A21 )<);<> =al )<);< >

*-)-,--

=al )<)+<>

7-7

)-,--

11-1


E11- A8?)/. E/&) %* F*&/. C&' B,,'&)

a.

?ecember *), ->+ Accounts @ecei$able 1Q# )-,--3oreign 'urrency Transaction 9ain Ad6ust recei$able denominated in 1gyptian pounds to current !.". dollar equi$alent and recogni4e exchange gain: (J*,+-- & 1Q/;,--- x (-.)+ ?ec. *) spot rate 7 *,+-- & Eread6usted ?ec. *), ->+, $alue ()-,---

)-,---

Accounts Eayable P# ;,-3oreign 'urrency Transaction 9ain ;,-Ad6ust payable denominated in foreign currency to current !.". dollar equi$alent and recogni4e exchange gain: ();,*-- & Eread6usted ?ec. *), ->+, $alue 7 )-,)-- & P),---,--- x (-.--J), ?ec. *) spot rate ( ;,-b.

Accounts @ecei$able 1Q# ),L-3oreign 'urrency Transaction 9ain ),L-Ad6ust recei$able denominated in 1gyptian Eounds to equi$alent !.". dollar $alue on settlement date: (J;,;-- & 1Q/;,--- x (-.)J- -> collection date $alue 7 J*,+-- & 1Q/;,--- x (-.)+ ?ec. *), ->+, spot rate ( ),L-- & 1Q/;,--- x (-.)J- 7 (-.)+# 'ash 3oreign 'urrency !nits 1Q# Accounts @ecei$able 1Q# Accounts @ecei$able (# 'ollect all accounts recei$able.

c.

)+/,--J;,;-J;,;-)+/,---

Accounts Eayable P# +,*-3oreign 'urrency Transaction 9ain Ad6ust payable to equi$alent !.". dollar $alue on settlement date: ()+*,J-- & P),---,--- x (-.--J -> payment date $alue 7 )-,)-- & P),---,--- x (-.--J) ?ec. *), ->+, spot rate ( +,*-- & P),---,--- x (-.--J 7 (-.--J)# Accounts Eayable (# Accounts Eayable P# 3oreign 'urrency !nits P# 'ash Eayment of all accounts payable.

+,*--

J+,--)+*,J-)+*,J-J+,---

11-1!


E11- continued#

d.

e.

f.

Transaction gain on 1Q: ?ecember *), ->+ ?ecember *), -> O$erall

()-,--),L-()),L--

gain gain gain

Transaction gain on P: ?ecember *), ->+ ?ecember *), -> O$erall

( ;,-+,*-()),;--

gain gain gain

O$erall foreign currency transactions gain: 9ain on 1Q transaction 9ain on P transaction

()),L-)),;-(*,/--

'hocolate ?e7Gites could ha$e hedged its exposed position. The exposed positions are only those denominated in foreign currency units. The accounts recei$able denominated in 1Q could be hedged by selling 1Q in the forward mar%et, thereby loc%ing in the $alue of the 1Q. The accounts payable denominated in P could be hedged by buying P in the forward mar%et, thereby loc%ing in the $alue of the P.

11-1"


E11-$ P'+,)&
*<)-

+
Transaction ?ate 7 Account payable in '( 7 "ign L-7day 31' to recei$e '(

"ettlement ?ate 7 @ecei$e '( from 31' completion 7 "ettle payable in '(

Farch )In$entory or Eurchases# ),)-Accounts Eayable '(# 3oreign purchase of engines: (),)-- & '(*-,--- x (-.; 3oreign 'urrency @ecei$able from 1xchange =ro%er '(# ?ollars Eayable to 1xchange =ro%er (# "igned L-7day forward exchange contract to recei$e '(: (),/-- & '(*-,--- x (-.;J forward rate

),)--

),/-),/--

2une J 3oreign 'urrency @ecei$able from =ro%er '(# +-3oreign 'urrency Transaction 9ain +-@e$alue foreign currency recei$able to current equi$alent !.". dollar $alue: ()J,--- & '(*-,--- x (-.+- 2une J spot rate 7 ),/-- & '(*-,--- x (-.;J Far. )- forward rate ( +-- & '(*-,--- x (-.+- 7 (-.;J# 3oreign 'urrency Transaction Goss L-Accounts Eayable '(# L-@e$alue foreign currency accounts payable to current !.". dollar $alue: (L-- & '(*-,--- x (-.+- 7 (-.;# ?ollars Eayable to 1xchange =ro%er (# 'ash Eay !.". dollars to exchange bro%er for forward contract.

),/--

3oreign 'urrency !nits '(# 3oreign 'urrency @ecei$able from 1xchange =ro%er '(# @ecei$e 'anadian dollars from exchange bro%er: ()J,--- & '(*-,--- x (-.+- spot rate

)J,---

Accounts Eayable '(# 3oreign 'urrency !nits '(# "ettle foreign currency payable.

)J,---

),/--

)J,---

)J,---

11-1#


E11-1!

P'+,)&
)<)+

)<*)

Transaction ?ate K Eayable in "3r K "ign 31' to recei$e "3r

=alance "heet date

3orward rate: "3r ) & (-.+ "pot rate: "3r ) & (-.+J

<)/

"ettlement ?ate K @ecei$e "3r from 31' K "ettle payable in "3r

"3r ) & (-.+L; "3r ) & (-.-

"3r ) & (-.+L

PART I: 3orward contract not a designated hedge.

a.

?ecember )+, -> 1quipment Accounts Eayable "3r# Eurchased equipment with payable denominated in "3r: (L;,-- & "3r )/-,--- x (-.+J spot rate 3oreign 'urrency @ecei$able from =ro%er "3r# ?ollars Eayable to 1xchange =ro%er (# "igned +-7day forward exchange contract: (L*,J-- & "3r )/-,--- x (-.+ forward rate

L;,-L;,--

L*,J-L*,J--

?ecember *), -> 3oreign 'urrency Transaction Goss ,J-Accounts Eayable "3r# @e$alue accounts payable to current !.". dollar equi$alent: (LJ,--- & "3r )/-,--- x (-.- ?ec. *) spot rate 7 L;,-- & "3r )/-,--- x (-.+J ?ec. )+ spot rate ( ,J-- & "3r )/-,--- x (-.- 7 (-.+J# 3oreign 'urrency @ecei$able from 1xchange =ro%er "3r# 3oreign 'urrency Transaction 9ain @e$alue foreign currency recei$able: (L,*-- & "3r )/-,--- x (-.+L; ?ec. *) forward rate 7 L*,J-- & "3r )/-,--- x (-.+ ?ec. )+ forward rate ( *,;-- & "3r )/-,--- x (-.+L; 7 (-.+#

11-2$

,J--

*,;-*,;--


E11-1! continued#

3ebruary )/, ->J 3oreign 'urrency Transaction Goss -3oreign 'urrency @ecei$able from 1xchange =ro%er "3r# @e$alue foreign currency recei$able to current equi$alent !.". dollar $alue: (L+,+-- & "3r )/-,--- x (-.+L 3eb. )/, ->J, spot rate 7 L,*-- & "3r )/-,--- x (-.+L; ?ec. *), ->, forward rate ( -- & "3r )/-,--- x (-.+L 7 (-.+L;#

--

Accounts Eayable "3r# ),/-3oreign 'urrency Transaction 9ain @e$alue foreign currency accounts payable to current !.". dollar $alue: (L+,+-- & "3r )/-,--- x (-.+L 3eb. )/, ->J, spot rate 7 LJ,--- & "3r )/-,--- x (-.- ?ec. *), ->, spot rate ( ),/-- & "3r )/-,--- x (-.+L 7 (-.-# ?ollars Eayable to 1xchange =ro%er (# 'ash Eay !.". dollars to exchange bro%er for forward contract.

L*,J--

3oreign 'urrency !nits "3r# 3oreign 'urrency @ecei$able from 1xchange =ro%er "3r# @ecei$e francs from exchange bro%er: (L+,+-- & "3r )/-,--- x (-.+L spot rate

L+,+--

Accounts Eayable "3r# 3oreign 'urrency !nits "3r# "ettle foreign currency payable.

L+,+--

),/--

L*,J--

L+,+--

L+,+--

b. 3oreign 'urrency 1xchange Goss with "wiss 'o.# 3oreign 'urrency 1xchange 9ain with =ro%er# Net effect on income c.

O$erall effect of transactions: -> 3oreign 'urrency 9ain ->J 3oreign 'urrency Goss on recei$able ->J 3oreign 'urrency Transaction 9ain on payable O$erall effect

11-21

(,J--# *,;-( -(

---# ),/-( ),/--


E11-1! continued# PART II: 3orward contract designated as a cash flow hedge.

?ecember )+, -> 1quipment Accounts Eayable "3r# Eurchased equipment with payable denominated in "3r: (L;,-- & "3r )/-,--- x (-.+J spot rate 3oreign 'urrency @ecei$able from =ro%er "3r# ?ollars Eayable to 1xchange =ro%er (# "igned +-7day forward exchange contract: (L*,J-- & "3r )/-,--- x (-.+ forward rate ?ecember *), -> 3oreign 'urrency Transaction Goss Accounts Eayable "3r# @e$alue accounts payable to current !.". dollar equi$alent: (LJ,--- & "3r )/-,--- x (-.- ?ec. *) spot rate 7 L;,-- & "3r )/-,--- x (-.+J ?ec. )+ spot rate ( ,J-- & "3r )/-,--- x (-.- 7 (-.+J#

L;,-L;,--

L*,J-L*,J--

,J-,J--

3oreign 'urrency @ecei$able from 1xchange =ro%er "3r# *,;-Other 'omprehensi$e Income *,;-@e$alue foreign currency recei$able with effecti$e portion of change in fair $alue of cash flow hedging deri$ati$e recorded in other comprehensi$e income: (L,*-- & "3r )/-,--- x (-.+L; ?ec. *) forward rate 7 L*,J-- & "3r )/-,--- x (-.+ ?ec. )+ forward rate ( *,;-- & "3r )/-,--- x (-.+L; 7 (-.+# Other 'omprehensi$e Income ,J-3oreign 'urrency Transaction 9ain ,J-In accordance with FASB 13 (ASC 15" , an amount is reclassified from other comprehensi$e income to fully offset the foreign currency transaction loss on the re$aluation of the foreign currency denominated account payable. 3ebruary )/, ->J Other 'omprehensi$e Income -3oreign 'urrency @ecei$able from 1xchange =ro%er "3r# -@e$alue foreign currency recei$able to current equi$alent !.". dollar $alue and record effecti$e portion of change into other comprehensi$e income in accordance with FASB 13 (ASC 15"; 3orward contract has now expired. (L+,+-- & "3r )/-,--- x (-.+L 3eb. )/, ->J, spot rate 7 L,*-- & "3r )/-,--- x (-.+L; ?ec. *), ->, forward rate ( -- & "3r )/-,--- x (-.+L 7 (-.+L;#

11-22


E11-1! continued#

Accounts Eayable "3r# ),/-3oreign 'urrency Transaction 9ain ),/-@e$alue foreign currency accounts payable to current !.". dollar $alue using the spot rate in accordance with FASB 52 (ASC 3!" : (L+,+-- & "3r )/-,--- x (-.+L 3eb. )/, ->J, spot rate 7 LJ,--- & "3r )/-,--- x (-.- ?ec. *), ->, spot rate ( ),/-- & "3r )/-,--- x (-.+L 7 (-.-# 3oreign 'urrency Transaction Goss ),/-Other 'omprehensi$e Income ),/-In accordance with FASB 13 (ASC 15" , an amount is reclassified from other comprehensi$e income to fully offset the foreign currency transaction gain on the re$aluation of the foreign currency denominated account payable. ?ollars Eayable to 1xchange =ro%er (# 'ash Eay !.". dollars to exchange bro%er for forward contract.

L*,J--

3oreign 'urrency !nits "3r# 3oreign 'urrency @ecei$able from 1xchange =ro%er "3r# @ecei$e francs from exchange bro%er: (L+,+-- & "3r )/-,--- x (-.+L spot rate

L+,+--

Accounts Eayable "3r# 3oreign 'urrency !nits "3r# "ettle foreign currency payable.

L+,+--

L*,J--

L+,+--

L+,+--

Note that there is a remaining credit balance of (),/-- in Other 'omprehensi$e Income. This represents the initial discount on the forward contract and will be reclassified into earnings in alignment with the depreciation on the equipment that was acquired.

11-23


E11-11 F*&/. C&' T,),'/*) 7AICPA A8,&89

).

d (-./JL; x (-./J/; x

.

b

*. d

M*-,--M*-,--9ain

->) ()/,+J; )/,;*; ( );-

(-./J/; x (-./L/; x

M*-,--M*-,--Goss

-> ()/,;*; )/,J*; ( *--#

2anuary ); 3oreign 'urrency !nits G'!# *--,--1xchange Goss );,--Accounts @ecei$able G'!# *);,--'ollect foreign currency recei$able and recogni4e foreign currency transaction loss for changes in exchange rates: (*--,--- & G'! L--,--- < G'! *# 2an. ); $alue 7 *);,--- & ?ec. *) !.". dollar equi$alent ( );,--- 3oreign currency transaction loss ()-,--()/-,---

& &

7)-;,---

&

(*;,---#

2uly ), ->), !.". dollar equi$alent $alue ?ecember *), ->), !.". dollar equi$alent $alue G'! J/-,--- < ()/-,---# & G'! + < () 2uly ), ->, !.". dollar equi$alent $alue G'! J/-,--- < J# & ()-;,--3oreign currency transaction loss

/. c

'() < (-.L- '().)) & ().--#

;. d

(J-,--- & 7/-,--- & ( /-,---

2uly ), ->;, !.". dollar equi$alent $alue ?ecember *), ->/, !.". dollar equi$alent $alue 3oreign currency transaction loss

+. d . d

11-24


E11-12 S,& / F*&/. C&'

a.

?irect exchange rates E) &

October )

?ecember )

Transaction ?ate

=alance "heet ?ate

(-.--+J

April ) "ettlement ?ate

(-.--J (-.--+

?ollar 0ea%ened rate increased# b.

?ollar "trengthened rate decreased#

October ), ->+ Accounts @ecei$able E# */,--"ales @e$enue "old equipment with recei$able denominated in pesetasE#: (*/,--- & E ;,---,--- x (-.--+J

*/,---

?ecember *), ->+ Accounts @ecei$able E# ;,--3oreign 'urrency Transaction 9ain ;,--@e$alue foreign currency recei$able to current !.". dollar equi$alent: (*L,--- & E ;,---,--- x (-.--J ?ec. *) spot rate 7 */,--- & E ;,---,--- x (-.--+J Oct. ) spot rate ( ;,--- & E ;,---,--- x (-.--J 7 (-.--+J# April ), -> 3oreign 'urrency Transaction Goss ),--Accounts @ecei$able E# @e$alue foreign recei$able to current !.". dollar equi$alent: (*J,--- & E ;,---,--- x (-.--+ April ) spot rate 7 *L,--- & E ;,---,--- x (-.--J ?ec. *) spot rate ( ),--- & E ;,---,--- x (-.--+ 7 (-.--J# 3oreign 'urrency !nits E# Accounts @ecei$able E# 'ollect foreign recei$able: (*J,--- & E ;,---,--- x (-.--+ c.

),---

*J,--*J,---

Net foreign currency transaction gain & (/,--October ) to ?ecember *) & (;,--- gain 2anuary ) to April ) & ),---# loss (/,--- gain Eroof: (/,--- & E ;,---,--- x (-.--+ 7 (-.--+J#

11-25


E11-13 S,&
April -

2une )L

Transaction ?ate K @ecei$able in %ronor K "ign 31' to deli$er %ronor

"ettlement ?ate K @ecei$e %ronor from recei$able K 'omplete 31' with deli$ery of %ronor

3orward rate: "Rr ) & (-.)+ "pot rate: "Rr ) & (-.)a.

"Rr ) & (-.)+;

April  Accounts @ecei$able "Rr# "ales @e$enue (*/,--- & "Rr --,--- x (-.) spot rate

*/,--*/,---

?ollars @ecei$able from 1xchange =ro%er 3oreign 'urrency Eayable to 1xchange =ro%er "Rr# "ign +-7day forward exchange contract to deli$er %ronor: (**,/-- & "Rr --,--- x (-.)+ forward rate

**,/-**,/--

2une )L 3oreign 'urrency Transaction Goss ),--Accounts @ecei$able "Rr# ),--@e$alue foreign currency recei$able to current equi$alent !.". dollar $alue: (**,--- & "Rr --,--- x (-.)+; 2une )L spot rate 7 */,--- & "Rr --,--- x (-.)- April - spot rate ( ),--- & "Rr --,--- x (-.)+; 7 (-.)-# 3oreign 'urrency Eayable to 1xchange =ro%er "Rr# 3oreign 'urrency Transaction 9ain @e$alue foreign currency payable to current !.". dollar $alue: (**,--- & "Rr --,--- x (-.)+; 2une )L spot rate 7 **,/-- & "Rr --,--- x (-.)+ April - forward rate ( /-- & "Rr --,--- x (-.-- 3oreign 'urrency !nits "Rr# Accounts @ecei$able "Rr# @ecei$e %ronor from foreign recei$able: (**,--- & "Rr --,--- x (-.)+; spot rate

/-/--

**,--**,---

3oreign 'urrency Eayable to 1xchange =ro%er "Rr# **,--3oreign 'urrency !nits "Rr# **,--Eay foreign currency units to exchange bro%er for forward payable contract. 'ash **,/-?ollars @ecei$able from 1xchange =ro%er (# **,/-@ecei$e !.". dollars in accordance with rate established in forward exchange contract.

11-2


E11-13 continued#

b.

1ffects on net income: !se of forward contract: )# ?ollar strengthened from April - to 2une )L 1xchange loss of (),--- on foreign currency recei$able 1xchange gain of (/-- for foreign currency payable to exchange bro%er therefore, net effect loss

(+--#

If Alman had not acquired the forward contract: )# ?ollar strengthened resulting in exchange loss of (),--- on foreign currency recei$able from customer ?ifference

),---# ( /--#

edging with the forward exchange contract resulted in (/-- less charged to net income thus, net income was higher as a result of acquiring the forward contract. E11-14 F*&/. C&' T,),'/*) 7AICPA A8,&89

). c (/,---

A21

Accounts Eayable M# --,--- x (-./J;# )<)-<>* /,----,--- x (-./+;# )<*)<>*

Accounts Eayable M# 3oreign 1xchange 9ain

L,;-L*,;--

/,--/,---

. d (,--- & (+,--- S (-,--- S (),-- Accounts Eayable 3'!# )<-<> A21 *<-<> 3oreign 1xchange Goss Accounts Eayable 3'!#

L-,--+,--L+,---

+,--+,---

11-2!



Notes Eayable 3'!# <-)<> A21 )<*)<> 3oreign 1xchange Goss Notes Eayable 3'!#

;--,---,--;-,---

-,---,---

Interest Eayable 3'!# (;--,--- x .)- x )< year# A21 )<*)> 3oreign 1xchange Goss Interest Eayable 3'!#

;,--),--+,---

),--),---

*. c (;,--)-<);<>) A21 ))<)+<>)

Accounts @ecei$able 3'!# )--,--;,--)-;,--- "ettlement

Accounts @ecei$able 3'!# 3oreign 1xchange 9ain

))<)+<>)

)-;,---

;,--;,---

Note: The recei$able is recorded on October );, ->), when the goods were shipped, not on "eptember ), ->), when the order was recei$ed. /. b (),---

>* A21

>/ A21 "ettlement

>/ A21

Accounts Eayable 3'!# )-,--- x (-.+-# ;--

/<-J<>*

+,---

)-,--- x (-.;;#

)<*)<>*

;,;--

)-,--- x (-./;#

*<-)<>/

/,;--

=al.

7-7

),--/,;--

Accounts Eayable 3'!# 3oreign 1xchange 9ain

),--),---

11-2"



;.

b

A gain should be reported because the peso wea%ened from ?ecember ); the transaction date# to the balance sheet date ?ecember *), ->;#. "te$ens would not record the purchase until title transferred on ?ecember );, ->;. The accounts payable recorded on ?ecember ); are denominated in pesos when the indirect exchange rate was () & - pesos. On ?ecember *), ->;, the indirect exchange rate was () & ) pesos, meaning that the dollar strengthened and the peso wea%ened. Therefore, a foreign currency transaction gain would be reported for ->;. This gain would be included in net income before extraordinary items.

+.

b

3oreign currency transaction gains and losses are reported on the income statements of !.". companies when recei$ables and payables are denominated in foreign currencies. "ince Gouis did not report any foreign exchange gains or losses, the payable to the 9erman company was denominated in !.". dollars, not 1uropean euros.

.

b

(L,--- & *--,--- pounds x ().+; 7 ().+#. The foreign currency transaction gain is computed using spot rates on the transaction date No$ember *-, ->;# and the balance sheet date ?ecember *), ->;#. The forward exchange rates are not used because the transaction was not hedged.

11-2#


E11-15 S,&
Fay )/

2une *-

2uly )*

Transaction ?ate =alance "heet ?ate K "ale with recei$able denominated in guilders K 1nter into +-7day 31' to deli$er guilders 3orward rate: 9 ) & (-.;/) "pot rate: 9 ) & (-.;*-

"ettlement ?ate K 'ollect recei$able in guilders K 'omplete 31' with deli$ery of guilders

9 ) & (-.;*9 ) & (-.;*/

9 ) & (-.;;

a. ).

.

*.

Fay )/ Accounts @ecei$able 9# "ales @e$enue 3oreign currency sale: (+,;-- & 9 ;-,--- x (-.;*Fay )/ ?ollars @ecei$able from 1xchange =ro%er 3oreign 'urrency Eayable to 1xchange =ro%er 9# "igned +-7day forward contract to deli$er guilders: (,-;- & 9 ;-,--- x (-.;/) forward rate

+,;-+,;--

,-;,-;-

2une * Accounts @ecei$able 9# -3oreign 'urrency Transaction 9ain -@e$alue foreign currency recei$able to end7of7period !.". dollar equi$alent using spot rate according to FASB 52 (ASC 3!" : (+,-- & 9 ;-,--- x (-.;*/ 2une *- spot rate 7 +,;-- & 9 ;-,--- x (-.;*- Fay )/ spot rate ( -- & 9 ;-,--- x (-.;*/ 7 (-.;*-# 3oreign 'urrency Eayable to 1xchange =ro%er 9# ;;3oreign 'urrency Transaction 9ain ;;@e$alue foreign currency payable to year7end fair $alue using forward rate according to FASB 133 (ASC 15" : (+,;-- & 9 ;-,--- x (-.;*- 2une *- forward rate 7 ,-;- & 9 ;-,--- x (-.;/) Fay )/ forward rate ( ;;- & 9 ;-,--- x (-.-))

11-3$



/.

2uly )* 3oreign 'urrency Transaction Goss /;Accounts @ecei$able 9# @e$alue foreign currency recei$able to !.". dollar equi$alent on settlement date: (+,;- & 9 ;-,--- x (-.;; 2uly )* spot rate 7 +,-- & 9 ;-,--- x (-.;*/ 2une *- spot rate ( /;- & 9 ;-,--- x (-.;; 7 (-.;*/# 3oreign 'urrency !nits 9# Accounts @ecei$able 9# 'ollect foreign currency recei$able.

;.

/;-

+,;+,;-

2uly )* 3oreign 'urrency Eayable to 1xchange =ro%er 9# ;3oreign 'urrency Transaction 9ain ;@e$alue foreign currency payable to fair $alue at settlement date using spot rate because the term of the contract has expired: (+,;- & 9 ;-,--- x (-.;; 2uly )* spot rate 7 +,;-- & 9 ;-,--- x (-.;*- 2une *- forward rate ( ;- & 9 ;-,--- x (-.--; 3oreign 'urrency Eayable to 1xchange =ro%er 9# 3oreign 'urrency !nits 9# Eay guilders to exchange bro%er.

+,;+,;-

'ash ,-;?ollars @ecei$able from 1xchange =ro%er ,-;@ecei$e dollars from exchange bro%er for guilders deli$ered: (,-;- & 9 ;-,--- x (-.;/) rate established in forward contract signed on Fay )/. b.

c.

d.

2une *3'T gain on account from Netherlands 'ompany 3'T gain on account to =ro%er Net increase in net income for 3D1 2une *-

(-;;(;-

2uly )* 3'T loss on account recei$able from Netherlands 'ompany 3'T gain on account to =ro%er Net decrease in net income for the period from 7) to 7)* Net increase in net income for the 3D1 +7*O$erall gain on transaction

(--# ;( ;;-

Fay )/ K 2une *- gain 2uly ) K 2uly )* loss O$erall loss if forward contract not used

( -/;-# (;-#

11-31

(/;-# ;-


E11-16A H&8.& *% , P'+,)& 'ommitment without and with Time alue of Foney

'onsideration# ))<)<>+

)<*)<>+

)<*-<>

K 'ommitment to deli$er pounds in )- days K "ign 31' to hedge foreign currency commitment

=alance "heet ?ate

Transaction ?ate K @eceipt of goods and recognition of foreign currency payable

3orward rate: Q) & ().;L "pot rate: Q) & ().+)

Q) & ().+

Q) & ().+-

Q) & ().+;

Q) & ().;L

*<)<>

"ettlement ?ate K @ecei$e =ritish pounds from settlement of 31' K Eay pounds to settle foreign currency accounts payable

Q) & ().;J;

a. No net exposure between No$ember ) and Farch ). "mith Imports, Inc., has hedged its foreign currency purchase commitment with a forward contract to recei$e an equal number of foreign currency units. Note that the notional amount of the forward exchange contract, the unrecogni4ed firm commitment, and the e$entual foreign currency7denominated account payable are each for Q*-,---. The impact on earnings from the forward contract will be a total of (+--, which is the amount of the discount on the forward contract Q*-,--- x ().+) spot rate K ().;L forward rate##. The subsequent analysis will show that (*-- of the (+-- will ad6ust the in$entory that will impact earnings when the in$entory is sold, and the remaining (*-- will be recogni4ed in earnings through the re$aluation process. b.

No$ember ), ->+ 3oreign 'urrency @ecei$able from 1xchange =ro%er Q# /,-?ollars Eayable to 1xchange =ro%er (# /,-"igned )-7day forward contract to hedge foreign currency commitment: (/,-- & Q*-,--- x ().;L forward rate ?ecember *), ->+ 3oreign 'urrency @ecei$able from 1xchange =ro%er Q# L-3oreign 'urrency Transaction 9ain @e$alue foreign currency recei$able to end7of7period fair $alue: (/J,+-- & Q*-,--- x ().+ ?ec. *) forward rate 7 /,-- & Q*-,--- x ().;L No$. ) forward rate ( L-- & Q*-,--- x ().+ 7 ().;L# 3oreign 'urrency Transaction Goss 3irm 'ommitment @ecord the loss on the firm commitment: (L-- & Q*-,--- x ().+ 7 ().;L#

11-32

L--

L-L--


E11-16A continued#

2anuary *-, -> 3oreign 'urrency Transaction Goss +-3oreign 'urrency @ecei$able from 1xchange =ro%er Q# @e$alue foreign currency recei$able to current !.". dollar equi$alent: (/J,--- & Q*-,--- x ().+- 2an. *- forward rate 7 /J,+-- & Q*-,--- x ().+ ?ec. *) forward rate ( +-- & loss, Q*-,--- x ().+- 7 ().+#

+--

3irm 'ommitment +-3oreign 'urrency Transaction 9ain +-@ecord the gain on the financial instrument aspect of the firm commitment: (+-- & Q*-,--- x ().+- 7 ().+# In$entory or Eurchases# /,/-3irm 'ommitment *-Accounts Eayable Q# /,-@ecord foreign currency account payable at spot rate and recogni4e change in $alue of the firm commitment as ad6ustment of purchase price: (/,-- & Q*-,--- x ().;L 2an. *- spot rate Farch ), -> 3oreign 'urrency Transaction Goss 3oreign 'urrency @ecei$able from 1xchange =ro%er Q# @e$alue foreign currency recei$able to fair $alue: (/,;;- & Q*-,--- x ().;J; Far. ) spot rate 7 /J,--- & Q*-,--- x ().+- 2an. *- forward rate ( /;- & Q*-,--- x ().;J; 7 ().+-# Accounts Eayable Q# 3oreign 'urrency Transaction 9ain @e$alue foreign payable to equi$alent !.". dollar $alue: ();- & Q*-,--- x ().;J; 7 ().;L#

/;/;-

););-

?ollars Eayable to 1xchange =ro%er (# /,- 'ash /,-?eli$er !.". dollars to exchange bro%er in accordance with forward exchange contract: (/,-- & Q*-,--- x ().;L forward rate 3oreign 'urrency !nits Q# 3oreign 'urrency @ecei$able from 1xchange =ro%er Q# @ecei$e *-,--- pounds from exchange bro%er: (/,;;- & Q*-,--- x ().;J; Far. ) spot rate

/,;;/,;;-

Accounts Eayable Q# /,;;3oreign 'urrency !nits Q# /,;;"ettle foreign currency payable with *-,--- pounds recei$ed from bro%er.

11-33



c.

'onsidering the time $alue of money in $aluing the forward contract. No$ember ), ->+ 3oreign 'urrency @ecei$able from 1xchange =ro%er Q# /,-?ollars Eayable to 1xchange =ro%er (# /,-"igned )-7day forward contract to hedge foreign currency commitment: (/,-- & Q*-,--- x ().;L forward rate ?ecember *), ->+ 3oreign 'urrency @ecei$able from 1xchange =ro%er Q# JJ 3oreign 'urrency Transaction 9ain JJ @e$alue foreign currency recei$able to discounted end7of7period fair $alue: (/J,+-- & Q*-,--- x ().+ ?ec. *) forward rate 7 /,-- & Q*-,--- x ().;L No$. ) forward rate ( L-- & Q*-,--- x ().+ 7 ().;L# ( JJ & NE .) x <), L--# 3oreign 'urrency Transaction Goss JJ 3irm 'ommitment JJ @ecord the loss on the financial instrument aspect of the firm commitment: (JJ & NE .) x <), L--# 2anuary *-, -> 3oreign 'urrency Transaction Goss ;J; 3oreign 'urrency @ecei$able from 1xchange =ro%er Q# @e$alue foreign currency recei$able to current !.". dollar equi$alent: (/J,--- & Q*-,--- x ().+- 2an. *- forward rate 7 /,-- & Q*-,--- x ().;L No$. ) forward rate ( *-- & 'umulati$e 9ain ( L & NE .) x )<), *--# 7 JJ & gain recogni4ed pre$iously ( ;J;# & net change in fair $alue

;J;

3irm 'ommitment ;J; 3oreign 'urrency Transaction 9ain ;J; @ecord the gain on the financial instrument aspect of the firm commitment. In$entory or Eurchases# /,/-* 3irm 'ommitment L Accounts Eayable Q# /,-@ecord foreign currency account payable at spot rate and recogni4e change in $alue of the firm commitment as ad6ustment of purchase price: (/,-- & Q*-,--- x ().;L 2an. *- spot rate

11-34



Farch ), -> 3oreign 'urrency Transaction Goss 3oreign 'urrency @ecei$able from 1xchange =ro%er Q# @e$alue foreign currency recei$able to fair $alue: (/,;;- & Q*-,--- x ().;J; Far. ), ->, spot rate 7 /,-- & Q*-,--- x ().;L No$. ), ->+, forward rate ( );- & cumulati$e, undiscounted loss o$er term of forward contract 7 L & pre$iously recogni4ed net gain ( // & loss for period

// //

Accounts Eayable Q# );3oreign 'urrency Transaction 9ain @e$alue foreign currency payable to equi$alent !.". dollar $alue: ();- & Q*-,--- x ().;J; 7 ().;L#

);-

?ollars Eayable to 1xchange =ro%er (# /,- 'ash /,-?eli$er !.". dollars to exchange bro%er in accordance with forward exchange contract: (/,-- & Q*-,--- x ().;L forward rate 3oreign 'urrency !nits Q# 3oreign 'urrency @ecei$able from 1xchange =ro%er Q# @ecei$e *-,--- pounds from exchange bro%er: (/,;;- & Q*-,--- x ().;J; Far. ) spot rate

/,;;/,;;-

Accounts Eayable Q# /,;;3oreign 'urrency !nits Q# /,;;"ettle foreign currency payable with *-,--- pounds recei$ed from bro%er .

11-35


E11-1# G,/ * L*)) * S&',/=& F*<,8 E0'+,.& C*,'

)<)<>)

)<*)<>)

"ign speculati$e forward exchange contract

=alance "heet ?ate

3orward rate: M) & (-.;J "pot rate: M) & (-.+a.

"ettlement of speculati$e forward exchange contract

M) & (-.;+ M) & (-.;L

M) & (-.;

1ffects of speculation on ->) income: ?ecember *), ->) ?ecember ), ->) "peculation gain in ->)

b.

*<)<>

M)-,--- x (-.;+ ( +,-& M)-,--- x (-.;J 7 +L,+-& ( ,/--#

1ffects of speculation on -> income: Farch ), -> ?ecember *), ->) "peculation loss in ->

M)-,--- x (-.; ( +J,/-& M)-,--- x (-.;+ 7 +,-& ( ),--

3oreign 'urrency Eayable M# )<*)<>) A21 ,/--

M)-,--- x (-.;J forward rate for *<)<># M)-,--- x (-.;+ forward rate for *<)<># M)-,--- x (-.; spot rate on *<)<>#

)<)<>)

+L,+--

)<*)<>) *<)<> A21

+,-),--

*<)<>

?ecember *), ->) A21 3oreign 'urrency Eayable M# 3oreign 1xchange 9ain

,/--

Farch ), -> A21 3oreign 1xchange Goss 3oreign 'urrency Eayable M#

),--

+J,/--

,/--

),--

11-3


E11-1 S&',/* / , F*&/. C&'

)-<)<>)

)<*)<>)

Transaction ?ate =alance "heet ?ate K 1nter )J-7day speculati$e forward exchange contract to purchase ;-,---,--- yen 3orward: P) & (-.--; "pot: P) & (-.--a.

P) & (-.--+ P) & (-.--*

*<*)<> "ettlement ?ate K "ettle speculati$e contract

P) & (-.--

October ), ->) 3oreign 'urrency @ecei$able from 1xchange =ro%er P# ?ollars Eayable to 1xchange =ro%er (# "ign )J-7day forward contract to recei$e ;-,---,--- yen: (*;,--- & P;-,---,--- x (-.--; forward rate

*;,--*;,---

?ecember *), ->) 3oreign 'urrency @ecei$able from 1xchange =ro%er P# ;,--3oreign 'urrency Transaction 9ain ;,--@e$alue speculati$e forward contract to equi$alent end7of7period !.". dollar $alue using forward rate on ?ec. *): (*J-,--- & P;-,---,--- x (-.--+ ?ec. *) forward rate for Far. *), ->, settlement 7 *;,--- & P;-,---,--- x (-.--; Oct. ) forward rate for Far. *), ->, settlement ( ;,--- & P;-,---,--- x (-.--+ 7 (-.--;# Farch *), -> 3oreign 'urrency Transaction Goss -,--3oreign 'urrency @ecei$able from 1xchange =ro%er P# -,--@e$alue speculati$e forward contract to current date, the end of the contract term, using Farch *) spot rate: (*+-,--- & P;-,---,--- x (-.-- Far. *) spot rate 7 *J-,--- & P;-,---,--- x (-.--+ ?ec. *) forward rate for Far. *), -> ( -,--- & P;-,---,--- x (-.-- 7 (-.--+# ?ollars Eayable to 1xchange =ro%er (# 'ash ?eli$er !.". dollars to exchange bro%er.

11-3!

*;,--*;,---


E11-1 continued#

b.

3oreign 'urrency !nits P# 3oreign 'urrency @ecei$able from 1xchange =ro%er P# @ecei$e yen from exchange bro%er: (*+-,--- & P;-,---,--- x (-.--

*+-,---

'ash 3oreign 'urrency !nits P# Trade yen for dollars, at ban%.

*+-,---

*+-,---

*+-,---

"treamline 'ompany experienced a net loss of ();,--- (;,--- gain in ->) less a (-,--- loss in ->#. This may be chec%ed by determining the difference between the dollars paid to the exchange bro%er on Farch *), ->, (*;,---# and the !.". dollar equi$alent $alue of the foreign currency recei$ed on Farch *) (*+-,---#.

11-3"


E11-1$ F*<,8 E0'+,.& T,),'/*) 7AICPA A8,&89

).

a

(/-- & )-,--- foreign currency units x (-.J 7 (-.J#. The loss is calculated using only forward rates. On ?ecember *), ->;, the loss is the difference between the L-7day future rate on No$ember ) (-.J# and the *-7day future rate on ?ecember *) (-.J#.

.

c

(),--- & ;-,--- 1uropean euros x (-./ 7 (-.#. The loss is calculated using only forward rates. On "eptember *-, ->;, the loss is the difference between the +-7day future rate of (-./ on "eptember ) and the *-7day future rate of (-. on "eptember *-, ->;.

*.

b

Fanage an exposed position: alue the forward exchange contract 31'# at its fair $alue, measured by changes in the forward exchange rate 31@#. Note that the question as%s only for the effect on income from the forward contract transaction thus, any effect on income from the foreign currency denominated account payable is not included in the answer. 31@, )<)<>; (-.L31@, )<*)<>; (-.L* A21: 3orward 'ontact @ecei$able *,--3oreign 1xchange 9ain @e$alue forward contract: (*,--- & 3r )--,--- x (-.L* 7 (-.L-# change in forward rates 3oreign 1xchange Goss )-,--Account Eayable 3r# @e$alue foreign currency payable: ()-,--- & 3r )--,--- x (-.LJ 7 (-.JJ# change in spot rates

/.

b

edge of a 3irm 'ommitment: alue 31' based on changes in forward rate. A21: 3orward 'ontract @ecei$able 3oreign 1xchange 9ain @e$alue forward contract, using the forward rates. 3oreign 1xchange Goss 3irm 'ommitment @ecogni4e loss on firm commitment.

*,---

)-,---

*,--*,--*,--*,---

Again, note that the question as%s only about the effect on income from the forward contract, not the underlying firm commitment portion of the transaction. ;.

b

"peculation: alue forward exchange contract at fair $alue based on changes in the forward rate. A21: 3orward 'ontract @ecei$able *,--3oreign 1xchange 9ain

11-3#

*,---


SOLUTIONS TO PROBLEMS P11-2! M/&-C+*/'& Q&)/*) * F*&/. C&' T,),'/*)

))<)<>J Transaction ?ate

)<*)<>J =alance "heet ?ate

K Eurchase with payable denominated in renminbi

).

.

b

c

"ettlement ?ate K @ecei$e renminbi upon settlement of forward exchange contract K Eay renminbi to settle foreign currency payable

K "ign L-7day forward exchange to recei$e renminbi 3orward rate: @ ) & (-.)+ "pot rate: @ ) & (-.)-

)<*-<>L

@ ) & (-.)L @ ) & (-.)/

@ ) & (-.)

No$ember ), ->J 3oreign 'urrency @ecei$able from 1xchange =ro%er @enminbi# ),+-?ollars Eayable to 1xchange =ro%er (# "igned L-7day forward exchange contract to purchase )--,--renminbi: (),+-- & )--,--- renminbi x (-.)+ forward rate ?ecember *), ->J 3oreign 'urrency @ecei$able from 1xchange =ro%er @enminbi# 3oreign 'urrency Transaction 9ain @e$alue foreign currency recei$able to fair $alue: (*-- & )--,--- renminbi x (-.)L 7 (-.)+#

),+--

*-*--

*.

b

2anuary *-, ->L ?ollars Eayable to 1xchange =ro%er (# ),+- 'ash ),+-?eli$er !.". dollars to exchange bro%er in accordance with forward exchange contract: (),+-- & )--,--- renminbi x (-.)+ contract rate

/.

b

2anuary *-, ->L ?ollars Eayable to 1xchange =ro%er (# ),+- 'ash ),+-?eli$er !.". dollars to exchange bro%er in accordance with forward exchange contract: (),+-- & )--,--- renminbi x (-.)+, the L-7day forward rate

11-4$


P11-2! continued#

;.

a

2anuary *-, ->L 3oreign 'urrency Transaction Goss -3oreign 'urrency @ecei$able from 1xchange =ro%er @enminbi# -Ad6ust foreign currency recei$able to current !.". dollar equi$alent: (),-- & )--,--- renminbi x (-.) 2an. *- spot rate 7 ),L-- & )--,--- renminbi x (-.)L ?ec. *) forward rate ( -- & )--,--- renminbi x (-.) 7 (-.)L# 3oreign 'urrency !nits @enminbi# 3oreign 'urrency @ecei$able from 1xchange =ro%er @ecei$e )--,--- renminbi from exchange bro%er: (),-- & )--,--- renminbi x (-.) spot rate

11-41

),-),--


P11-21 F*&/. S,&)

).

2une + Accounts @ecei$able ?%r# "ales @e$enues 3oreign sale and foreign currency recei$able: (),--- & ?%r)-,--- x (-.);

),--),---

2uly * Accounts @ecei$able ?%r# *+ 3oreign 'urrency Transaction 9ain @e$alue foreign currency recei$able to !.". dollar equi$alent $alue: (),-*+ & ?%r)-,--- x (-.);* 2uly * spot rate 7 ),--- & ?%r)-,--- x (-.);- 2une + spot rate ( *+ & ?%r)-,--- x (-.);* 7 (-.);-#

.

3oreign 'urrency !nits ?%r# Accounts @ecei$able ?%r# 'ollect accounts recei$able in ?%r.

),-*+

Accounts @ecei$able Q# "ales @e$enue 3oreign sale and foreign currency recei$able: (/,/-- & Q*-,--- x ().;J

/,/--

?ollars @ecei$able from 1xchange =ro%er (# 3oreign 'urrency Eayable to 1xchange =ro%er Q# "igned +-7day forward contract to sell pounds: (/J,L-- & Q*-,--- x ().+* forward rate

/J,L--

*+

),-*+

2uly 

"eptember  Accounts @ecei$able Q# 3oreign 'urrency Transaction 9ain @e$alue foreign currency recei$able: (/J,*+- & Q*-,--- x ().+) "ept. - spot rate 7 /,/-- & Q*-,--- x ().;J 2uly  spot rate ( L+- & Q*-,--- x ().+) 7 ().;J# 3oreign 'urrency Eayable to 1xchange =ro%er Q# 3oreign 'urrency Transaction 9ain @e$alue foreign currency payable: (/J,*+- & Q*-,--- x ().+) "ept. - spot rate 7 /J,L-- & Q*-,--- x ().+*- 2uly  forward rate ( ;/- & Q*-,--- x ().+) 7 ().+*-# 3oreign 'urrency !nits Q# Accounts @ecei$able Q# @ecei$e pounds from customer.

11-42

/,/--

/J,L--

L+L+-

;/;/-

/J,*+/J,*+-


P11-21 continued#

*.

3oreign 'urrency Eayable to 1xchange =ro%er Q# 3oreign 'urrency !nits Q# ?eli$er pounds to bro%er.

/J,*+-

'ash ?ollars @ecei$able from 1xchange =ro%er (# @ecei$e !.". dollars from bro%er in accordance with forward contract.

/J,L--

October )) Accounts @ecei$able '(# "ales @e$enue "ale to 'anadian firm denominated in 'anadian dollars: '(-,--- x (-.*; ?ollars @ecei$able from 1xchange =ro%er (# 3oreign 'urrency Eayable to 1xchange =ro%er '(# "ign +-7day forward contract to sell 'anadian dollars: (;),)-- & '(-,--- x (-.*- forward rate

/J,*+-

/J,L--

;),/;;),/;-

;),)-;),)--

No$ember )3oreign 'urrency Transaction Goss )Accounts @ecei$able '(# @e$alue foreign currency recei$able to equi$alent !.". dollar $alue: (;),/- & '(-,--- x (-.* No$. )- spot rate 7 ;),/;- & '(-,--- x (-.*; Oct. )) spot rate ( )- & '(-,--- x (-.*7 (-.*;# 3oreign 'urrency Transaction Goss 3oreign 'urrency Eayable to 1xchange =ro%er '(# @e$alue foreign currency payable: (;),/- & '(-,--- x (-.* No$. )- spot rate 7 ;),)-- & '(-,--- x (-.*- Oct. )) forward rate ( )/- & '(-,--- x (-.* 7 (-.*-#

)-

)/)/-

3oreign 'urrency !nits '(# Accounts @ecei$able '(# @ecei$e 'anadian dollars from customer: (;),/- & '(-,--- x (-.* No$. )- spot rate.

;),/-

3oreign 'urrency Eayable to 1xchange =ro%er '(# 3oreign 'urrency !nits '(# ?eli$er 'anadian dollars to bro%er.

;),/-

;),/-

;),/-

'ash ;),)-?ollars @ecei$able from 1xchange =ro%er (# ;),)-@ecei$e !.". dollars from bro%er in accordance with forward contract rate.

11-43


P11-22 F*&/. C&' T,),'/*)

).

2anuary ); Accounts @ecei$able "ales @e$enue 3oreign export denominated in !.". dollars. Farch ); 'ash Accounts @ecei$able 'ollect recei$able from "outh Rorean firm.

.

,/-,/--

,/-,/--

Farch J In$entory or Eurchases# )),+Accounts Eayable I@Q# )),+3oreign in$entory purchase with payable denominated in foreign currency: ()),+- & I@Q,--- x ().+J Fay ) Accounts Eayable I@Q# )/3oreign 'urrency Transaction 9ain @e$alue foreign currency payable to current !.". dollar equi$alent: ()),+- & I@Q,--- x ().++ Fay ) spot rate 7 )),+- & I@Q,--- x ().+J Far. J spot rate ( )/- & I@Q,--- x ().++ 7 ().+J#

)/-

9lobe "hipping must settle the payable in foreign currency units. 3oreign currency units or foreign currency drafts chec%s written in terms of foreign currency units# may be obtained from most ma6or ban%s. Accounts Eayable I@Q# 3oreign 'urrency !nits I@Q# "ettlement of foreign currency payable: ()),+- & I@Q,--- x ().++ Fay ) spot rate *.

)),+)),+-

Fay ) 3oreign 'urrency @ec. from 1xchange =ro%er NT(# *,--J ?ollars Eayable to 1xchange =ro%er (# "igned )-7day forward contract to hedge a foreign currency commitment: (*,--J & NT(J-,--- x (-.-*+ forward rate

11-44

*,--J



August ) 3oreign 'urrency @ecei$able from 1xchange =ro%er NT(# 3oreign 'urrency Transaction 9ain @e$alue foreign currency recei$able to fair $alue (*,-/ & NT(J-,--- x (-.-*J Aug. ) forward rate 7 *,--J & NT(J-,--- x (-.-*+ Fay ) forward rate ( )+ & NT(J-,--- x (-.-*J 7 (-.-*+#

)+ )+

3oreign 'urrency Transaction Goss )+ 3irm 'ommitment @ecord the loss on the financial statement aspect of the firm commitment: ()+ & NT(J-,--- x (-.-*J 7 (-.-*+# In$entory or Eurchases# ,LJ/ 3irm 'ommitment )+ Accounts Eayable NT(# @eceipt of goods and ad6ustment of in$entory cost by deferrals: (*,--- & NT(J-,--- x (-.-*; Aug. ) spot rate "eptember L 3oreign 'urrency Transaction Goss 3oreign 'urrency @ecei$able from 1xchange =ro%er NT(# @e$alue foreign currency recei$able to fair $alue: (,L+ & NT(J-,--- x (-.-* "ept. L spot rate 7 *,-/ & NT(J-,--- x (-.-*J Aug. ) forward rate ( /J & NT(J-,--- x (-.-* 7 (-.-*J# Accounts Eayable NT(# 3oreign 'urrency Transaction 9ain @e$alue foreign currency payable: (/ & NT(J-,--- x (-.-* 7 (-.-*;#

*,---

/J /J

/ /

?ollars Eayable to 1xchange =ro%er (# 'ash ?eli$er !.". dollars to forward exchange bro%er.

*,--J

3oreign 'urrency !nits NT(# 3oreign 'urrency @ecei$able from 1xchange =ro%er NT(# @ecei$e Taiwan dollars from exchange bro%er: (,L+ & NT(J-,--- x (-.-* "ept. L spot rate.

,L+

Accounts Eayable NT(# 3oreign 'urrency !nits NT(# "ettle foreign currency payable.

,L+

11-45

)+

*,--J

,L+

,L+



/.

2une + Accounts @ecei$able M# "ales @e$enues 1xport sale denominated in euros: (L-,--- & M);-,--- x (-.+--

L-,---

?ollars @ecei$able from 1xchange =ro%er (# 3oreign 'urrency Eayable to 1xchange =ro%er M# "igned +-7day forward contract to deli$er euros: (J,--- & M);-,--- x (-.;J- forward rate

J,---

L-,---

2uly + J,---

"eptember / 3oreign 'urrency Transaction Goss ,;Accounts @ecei$able M# @e$alue foreign currency recei$able to equi$alent !.". dollar $alue: (J,;- & M);-,--- x (-.;J; "ept. / spot rate 7 L-,--- & M);-,--- x (-.+-- 2une + spot rate ( ,;- & M);-,--- x (-.;J; 7 (-.+--# 3oreign 'urrency Transaction Goss 3oreign 'urrency Eayable to 1xchange =ro%er M# @e$alue foreign currency payable for loss since 2uly +: (J,;- & M);-,--- x (-.;J; "ept. / spot rate 7 J,--- & M);-,--- x (-.;J- 2uly + forward rate ( ;- & M);-,--- x (-.;J; 7 (-.;J-#

,;-

;;-

3oreign 'urrency !nits M# Accounts @ecei$able M# @ecei$e euros from customer: (J,;- & M);-,--- x (-.;J; "ept. / spot rate.

J,;-

3oreign 'urrency Eayable to 1xchange =ro%er M# 3oreign 'urrency !nits M# ?eli$er euros to exchange bro%er.

J,;-

J,;-

J,;-

'ash J,--?ollars @ecei$able from 1xchange =ro%er (# J,--@ecei$e !.". dollars from bro%er in accordance with forward contract signed on 2uly +: (J,--- & M);-,--- x (-.;J- forward contract rate.

11-4


P11-23A

C*&+&)/=& P*&: F* U)&) *% F*<,8 E0'+,.& C*,')
a. !se of forward contract to manage foreign currency ris% of exposed foreign currency position. Not designated as a hedge. )<)<>) Transaction ?ate

)<*)<>) =alance "heet ?ate

K Eurchase of furniture resulting in foreign currency payable K "ign foreign exchange contract to recei$e Australian dollars on Farch *) 3orward rate: A() & (-.+-L "pot rate: A() & (-.+--

*<*)<> "ettlement ?ate K "ettle forward exchange contract and recei$e )--,--- Australian dollars K Eay foreign currency payable

A() & (-.+) A() & (-.+)-

A() & (-.+-

?ecember ), ->) In$entory or Eurchases# Accounts Eayable A(# 3oreign currency payable: (+-,--- & A()--,--- x (-.+--

+-,--+-,---

3oreign 'urrency @ecei$able from 1xchange =ro%er A(# +-,L-?ollars Eayable to 1xchange =ro%er (# +-,L-"igned forward exchange contract to manage exposed foreign currency payable: (+-,L-- & A()--,--- x (-.+-L forward rate ?ecember *), ->) 3oreign 'urrency Transaction Goss ),--Accounts Eayable A(# @e$alue foreign currency payable to equi$alent !.". dollar $alue: (+),--- & A()--,--- x (-.+)- ?ec. *) spot rate 7 +-,--- & A()--,--- x (-.+-- ?ec. ) spot rate ( ),--- & A()--,--- x (-.+)- 7 (-.+--# 3oreign 'urrency @ecei$able from 1xchange =ro%er A(# 3oreign 'urrency Transaction 9ain @e$alue foreign currency recei$able: (+),-- & A()--,--- x (-.+) ?ec. *) forward rate 7 +-,L-- & A()--,--- x (-.+-L ?ec. ) forward rate ( *-- & A()--,--- x (-.+) 7 (-.+-L#

11-4!

),---

*-*--


P11-23A continued# N*&: 3or this case, no entry necessary on 2anuary *-, ->.

Farch *), -> 3oreign 'urrency Transaction Goss 3oreign 'urrency @ecei$able from 1xchange =ro%er A(# @e$alue foreign currency recei$able: (+-,-- & A()--,--- x (-.+- Far. *), ->, spot rate 7 +),-- & A()--,--- x (-.+) ?ec. *), ->), forward rate ( ),--- & A()--,--- x (-.+- 7 (-.+)# Accounts Eayable A(# 3oreign 'urrency Transaction 9ain @e$alue foreign currency payable: (+-,-- & A()--,--- x (-.+- Far. *), ->, spot rate 7 +),--- & A()--,--- x (-.+)- ?ec. *), ->), spot rate ( J-- & A()--,--- x (-.+- 7 (-.+)-#

),--),---

J-J--

?ollars Eayable to 1xchange =ro%er (# +-,L- 'ash +-,L-?eli$er !.". dollars to exchange bro%er as required by forward contract. 3oreign 'urrency !nits A(# +-,-3oreign 'urrency @ecei$able from 1xchange =ro%er A(# +-,- @ecei$e A()--,--- from exchange bro%er in accordance with forward contract: (+-,-- & A()--,--- x (-.+- Far. *) spot rate. Accounts Eayable A(# 3oreign 'urrency !nits A(# ?eli$er A()--,--- to creditor. b. !se of forward contract as fair $alue hedge of foreign currency firm commitment.

11-4"

+-,-+-,--


)<)<>)

)<*)<>)

'ommitment ?ate

=alance "heet ?ate

K "ign foreign exchange contract to hedge foreign currency payable fi f irm commitment 3orward rate: A() & (-.+-L "pot rate: A() & (-.+--

)<*-<>

Transaction ?ate K Eurchase of furniture resulting in foreign currency pa payable

A() & (-.+)

A() & (-.+-;

A() & (-.+)-

A() & (-.+-J

11-4#

*<*)<>

"ettlement ?ate K "ettle foreign currency commitment and recei$e A()--,--K Eay foreign currency

A() & (-.+-


P11-23A continued#

?ecember ), ->) 3ore 3oreig ign n 'urr 'urren ency cy @ece @ecei$ i$ab able le from from 1xch 1xchan ange ge =ro% =ro%er er A(# A(# +-,L +-,L--?ollars Eayable to 1xchange =ro%er (# +-,L-"igned )-7day forward contract contract to hedge foreign currency commitment to purchase furniture on 2anuary *- for A()--,---: (+-,L-- & A()--,--- x (-.+-L forward rate ?ecember *), ->) 3oreign 'u 'urrency @ecei$able fr from 1x 1xchange =r =ro%er A(# 3oreign 'urrency Transaction 9ain @e$alue foreign currency currency recei$able to fair $alue: (+),-- & A()--,--- x (-.+) ?ec. *) forward forward rate 7 +-,L-- & A()--,--A()--,--- x (-.+-L ?ec. ) forward forward rate ( *-- & A()--,--- x (-.+) 7 (-.+-L#

*-*--

3oreign 'urrency Transaction Goss *-3irm 'ommitment *-@ecord the loss on the financial instrument instrument aspect of the firm firm commitment: (*-- & A()--,--- x (-.+) 7 (-.+-L# 2anuary *-, -> 3oreign 'urrency Transaction Goss -3oreign 'urrency @ecei$able from 1xchange =ro%er A(# @e$alue foreign currency recei$able to current !.". dollar equi$alent: equi$alent: (+-,;-- & A()--,--- x (-.+-; 2an. *-, ->, forward forward rate 7 +),-- & A()--,--A()--,--- x (-.+) ?ec. *), ->), forward forward rate ( -- & A()--,--- x (-.+-; 7 (-.+)#

--

3irm 'ommitment -3oreign 'urrency Transaction 9ain -@ecord the gain on the financial instrument aspect of the firm commitment: commitment: (-- & A()--,--- x (-.+-; 7 (-.+)# In$entory or Eurchases# +),-3irm 'ommitment Accounts Eayable A(# Acquire furniture initially committed to on ?ecember ), ->): ->): (+-,J-- & A()--,--- x (-.+-J spot rate

11-5$

/-+-,J--



Farch *), -> 3oreign 'urrency Transaction Goss 3oreign 'urrency @ecei$able from 1xchange =ro%er A(# @e$alue foreign currency recei$able: (+-,-- & A()--,--A()--,--- x (-.+- Far. Far. *) spot rate 7 +-,;-- & A()--,--A()--,--- x (-.+-; 2an. *- forward forward rate ( *-- & A()--,--- x (-.+- 7 (-.+-;# Accounts Eayable A(# 3oreign 'urrency Transaction 9ain @e$alue foreign currency payable: (+-,-- & A()--,--A()--,--- x (-.+- Far. Far. *) spot rate 7 +-,J-- & A()--,--A()--,--- x (-.+-J 2an. *- spot rate ( +-- & A()--,--- x (-.+- 7 (-.+-J# ?ollars Eayable to 1xchange =ro%er (# 'a 'ash ?eli$er !.". !.". dollars to exchange bro%er.

*-*--

+-+--

+-,L-+-,L--

3oreign 'urrency !nits A(# +-,-3oreign 'urrency @ecei$able from 1xchange =ro%er A(# +-,-@ecei$e A()--,--A()--,--- from bro%er in accordance with with forward contract signed on ?ecember ): (+-,-- & A()--,--A()--,--- x (-.+- Far. Far. *) spot rate. Accounts Eayable A(# 3oreign 'urrency !nits A(# ?eli$er A()--,--- to foreign creditor. creditor.

11-51

+-,-+-,--


P-11-23A continued#

c. !se of forward contract as cash flow hedge of forecasted foreign currency transaction. )<)<>)

'ommitment ?ate

)<*)<>)

)<*-<>

*<*)<>

=alance "heet ?ate

Transaction ?ate

"ettlement ?ate

K Eurchase of furniture resulting in foreign currency payable

K "ettle foreign currency commitment and recei$e A()--,--K Eay foreign currency payable

K "ign foreign exchange contract to hedge forecasted foreign currency transaction.

3orward rate: A() & (-.+-L "pot rate: A() & (-.+--

A() & (-.+)

A() & (-.+-;

A() & (-.+)-

A() & (-.+-J

A() & (-.+-

?ecember ), ->) 3oreign 'urrency @ecei$able from 1xchange =ro%er A(# +-,L-?ollars Eayable to 1xchange =ro%er (# +-,L-"igned )-7day forward contract as a cash flow hedge of the forecasted foreign currency transaction of the purchase of furniture on 2anuary *- for A()--,---: (+-,L-- & A()--,--- x (-.+-L forward rate ?ecember *), ->) 3oreign 'urrency @ecei$able from 1xchange =ro%er A(# *-Other 'omprehensi$e Income *-@e$alue foreign currency recei$able to fair $alue and record O'I for effecti$e portion of change in fair $alue of the deri$ati$e designated as a cash flow hedge: (+),-- & A()--,--- x (-.+) ?ec. *) forward rate 7 +-,L-- & A()--,--- x (-.+-L ?ec. ) forward rate ( *-- & A()--,--- x (-.+) 7 (-.+-L#

11-52



2anuary *-, -> Other 'omprehensi$e Income -3oreign 'urrency @ecei$able from 1xchange =ro%er A(# -@e$alue foreign currency recei$able to current !.". dollar equi$alent and record O'I for the effecti$e portion of the change in fair $alue of the deri$ati$e designated as a cash flow hedge: (+-,;-- & A()--,--- x (-.+-; 2an. *-, ->, forward rate 7 +),-- & A()--,--- x (-.+) ?ec. *), ->), forward rate ( -- & A()--,--- x (-.+-; 7 (-.+)# In$entory or Eurchases# Accounts Eayable A(# Acquire furniture and $alue at spot rate: (+-,J-- & A()--,--- x (-.+-J spot rate

+-,J-+-,J--

Farch *), -> Other 'omprehensi$e Income *-3oreign 'urrency @ecei$able from 1xchange =ro%er A(# *-@e$alue foreign currency recei$able and record into O'I the effecti$e portion of change in fair $alue of deri$ati$e designated as a cash flow hedge: (+-,-- & A()--,--- x (-.+- Far. *) spot rate 7 +-,;-- & A()--,--- x (-.+-; 2an. *- forward rate ( *-- & A()--,--- x (-.+- 7 (-.+-;# Accounts Eayable A(# +-3oreign 'urrency Transaction 9ain +-@e$alue foreign currency payable using spot rate and recogni4ing change into current earnings as specified by FASB 52 (ASC 3!" : (+-,-- & A()--,--- x (-.+- Far. *) spot rate 7 +-,J-- & A()--,--- x (-.+-J 2an. *- spot rate ( +-- & A()--,--- x (-.+- 7 (-.+-J# 3oreign 'urrency Transaction Goss +-Other 'omprehensi$e Income +-In accordance with FASB 13 (ASC 15" , reclassify amount from O'I sufficient to completely offset the foreign currency transaction gain on the foreign currency payable A(# that was hedged with a deri$ati$e designated as a cash flow hedge. ?ollars Eayable to 1xchange =ro%er (# 'ash ?eli$er !.". dollars to exchange bro%er.

+-,L-+-,L--

3oreign 'urrency !nits A(# +-,-3oreign 'urrency @ecei$able from 1xchange =ro%er A(# +-,-@ecei$e A()--,--- from bro%er in accordance with forward contract signed on ?ecember ): (+-,-- & A()--,--- x (-.+- Far. *) spot rate.

11-53



Accounts Eayable A(# 3oreign 'urrency !nits A(# ?eli$er A()--,--- to foreign creditor.

+-,-+-,--

Note: At this point there is still a debit balance of ()-- in Other 'omprehensi$e Income. This balance will be reclassified into earnings at the time the in$entory is sold which is the completion of the earnings process of the purchase of the in$entory. d. 3orward contract used for speculati$e purposes only. )<)<>) Transaction ?ate K "ign )- day speculati$e contract to purchase )--,--Australian dollars. 3orward rate: A() & (-.+-L "pot rate: A() & (-.+--


*<*)<> "ettlement ?ate K "ettle forward exchange contract and recei$e A()--,---

A() & (-.+) A() & (-.+)-

A() & (-.+-

?ecember ), ->) 3oreign 'urrency @ecei$able from 1xchange =ro%er A(# ?ollars Eayable to 1xchange =ro%er (# "igned )-7day forward contract for speculation: (+-,L-- & A()--,--- x (-.+-L

+-,L-+-,L--

?ecember *), ->) 3oreign 'urrency @ecei$able from 1xchange =ro%er A(# *-3oreign 'urrency Transaction 9ain @e$alue foreign currency recei$able to equi$alent !.". dollar $alue: (+),-- & A()--,--- x (-.+) ?ec. *) forward rate 7 +-,L-- & A()--,--- x (-.+-L ?ec. ) forward rate ( *-- & A()--,--- x (-.+) 7 (-.+-L# Farch *), -> 3oreign 'urrency Transaction Goss 3oreign 'urrency @ecei$able from 1xchange =ro%er A(# @e$alue foreign currency recei$able: (+-,-- & A()--,--- x (-.+- Far. *), ->, spot rate 7 +),-- & A()--,--- x (-.+) ?ec. *), ->), forward rate ( ),--- & A()--,--- x (-.+- 7 (-.+)# ?ollars Eayable to 1xchange =ro%er (# 'ash ?eli$er !.". dollars to forward exchange bro%er.

11-54

*--

),--),---

+-,L-+-,L--



3oreign 'urrency !nits A(# 3oreign 'urrency @ecei$able from 1xchange =ro%er A(# @ecei$e A()--,--- from exchange bro%er: (+-,-- & A()--,--- x (-.+- spot rate e.

+-,-+-,--

!se of forward contract to manage exposed foreign currency position, considering the time $alue of money at a ) percent annual rate. 3orward contract not designated as a hedge. )<)<>) Transaction ?ate K Eurchase of furniture resulting in foreign currency payable K "ign hedging foreign exchange contract to recei$e Australian dollars on Farch *) 3orward rate: A() & (-.+-L "pot rate: A() & (-.+--


*<*)<> "ettlement ?ate K "ettle forward exchange contract and recei$e A()--,--K Eay foreign currency payable

A() & (-.+) A() & (-.+)-

A() & (-.+-

?ecember ), ->) In$entory or Eurchases# Accounts Eayable A(# 3oreign currency payable: (+-,--- & A()--,--- x (-.+--

+-,--+-,---

3oreign 'urrency @ecei$able from 1xchange =ro%er A(# +-,L-?ollars Eayable to 1xchange =ro%er (# +-,L-"igned forward exchange contract to hedge exposed foreign currency payable: (+-,L-- & A()--,--- x (-.+-L forward rate ?ecember *), ->) 3oreign 'urrency Transaction Goss ),--Accounts Eayable A(# @e$alue foreign currency payable to equi$alent !.". dollar $alue: (+),--- & A()--,--- x (-.+)- ?ec. *) spot rate 7 +-,--- & A()--,--- x (-.+-- ?ec. ) spot rate ( ),--- & A()--,--- x (-.+)- 7 (-.+--#

11-55

),---



3oreign 'urrency @ecei$able from 1xchange =ro%er A(# 3oreign 'urrency Transaction 9ain @e$alue foreign currency recei$able: (+),-- & A()--,--- x (-.+) ?ec. *) forward rate 7 +-,L-- & A()--,--- x (-.+-L ?ec. ) forward rate ( *-- & A()--,--- x (-.+) 7 (-.+-L# cumulati$e, undiscounted gain from ?ec. ) ( L) & NE .) x *<), *--# for remaining * months from )<*)<>) K *<*)<>

L) L)

N*&: 3or this case, no entry necessary on 2anuary *-, ->.

Farch *), -> 3oreign 'urrency Transaction Goss 3oreign 'urrency @ecei$able from 1xchange =ro%er A(# @e$alue foreign currency recei$able: (+-,-- & A()--,--- x (-.+- Far. *), ->, spot rate 7 +-,L-- & A()--,--- x (-.+-L ?ec. ), ->), forward rate ( --# & cumulati$e, undiscounted loss o$er term of forward contract 7 L) & gain pre$iously recogni4ed on ?ec. *), ->) ( LL)# & change in fair $alue this period Accounts Eayable A(# 3oreign 'urrency Transaction 9ain @e$alue foreign currency payable: (+-,-- & A()--,--- x (-.+- Far. *), ->, spot rate 7 +),--- & A()--,--- x (-.+)- ?ec. *), ->), spot rate ( J-- & A()--,--- x (-.+- 7 (-.+)-#

LL) LL)

J-J--

?ollars Eayable to 1xchange =ro%er (# +-,L- 'ash +-,L-?eli$er !.". dollars to exchange bro%er as required by forward contract. 3oreign 'urrency !nits A(# +-,-3oreign 'urrency @ecei$able from 1xchange =ro%er A(# +-,-@ecei$e A()--,--- from exchange bro%er in accordance with forward contract: (+-,-- & A()--,--- x (-.+- Far. *) spot rate. Accounts Eayable A(# 3oreign 'urrency !nits A(# ?eli$er A()--,--- to creditor.

11-5

+-,-+-,--


P11-24 F*&/. P'+,)&) ,8 S,&) T,),'/*) ,8 H&8./. P, I

a.

2ournal entries for Faple5s import and export transactions during ->; and ->+:

).

Farch ), ->; Accounts @ecei$able '(# "ales ()L,;-- & '(*-,--- x (-.+; spot rate Fay *-, ->; Accounts @ecei$able '(# 3oreign 'urrency Transaction 9ain (L-- & '(*-,--- x (-.+J 7 .+;#

.

)L,;-)L,;--

L-L--

3oreign 'urrency !nits '(# Accounts @ecei$able '(# (-,/-- & '(*-,--- x (-.+J

-,/--

'ash 3oreign 'urrency !nits '(#

-,/--

-,/--

-,/--

2uly ), ->; No entry is recorded when the contract to purchase equipment is signed. August *-, ->; 1quipment Accounts Eayable P# (;,--- & P;--,--- x (-.)-/

;,--;,---

October L, ->; 3oreign 'urrency Transaction Goss Accounts Eayable P# (),--- & P;--,--- x (-.)-+ 7 (-.)-/#

),--),---

3oreign 'urrency !nits P# 'ash (;*,--- & P;--,--- x (-.)-+

;*,---

Accounts Eayable P# 3oreign 'urrency !nits P#

;*,---

;*,---

;*,---

11-5!



*.

No$ember )+, ->; In$entory Accounts Eayable Q# ()+,;-- & Q)-,--- x ().+;

)+,;-)+,;--

?ecember *), ->; Accounts Eayable Q# 3oreign 'urrency Transaction 9ain (-- & Q)-,--- x ().+* 7 ().+;# 2anuary );, ->+ 3oreign 'urrency Transaction Goss Accounts Eayable Q# ()-- & Q)-,--- x ().+/ 7 ().+*#

b.

---

)-)--

3oreign 'urrency !nits Q# 'ash ()+,/-- & Q)-,--- x ().+/

)+,/--

Accounts Eayable Q# 3oreign 'urrency !nits Q#

)+,/--

)+,/--

)+,/--

Faple should report a foreign currency transaction gain of ()-- on its income statement for ->;. This amount is computed as follows: 3oreign currency transaction gain from transaction denominated in pounds 3oreign currency transaction gain from transaction denominated in 'anadian dollars Gess foreign currency transaction loss from transaction denominated in yen 3oreign currency transaction gain for ->;

11-5"

( -L-),---# ( )--


P11-24 continued# P, II

a.

). 2ournal entries for the use of a forward contract to manage the foreign currency exposure of the sale in 'anadian dollars: Farch ), ->; ?ollars @ecei$able from 1xchange =ro%er 3oreign 'urrency Eayable to 1xchange =ro%er '(# ()L,-- & '(*-,--- x (-.+/ forward rate Fay *-, ->; 3oreign 'urrency Transaction Goss 3oreign 'urrency Eayable to 1xchange =ro%er '(# (-,/-- & '(*-,--- x (-.+J Fay *- spot rate 7 )L,-- & '(*-,--- x (-.+/ Farch ) forward rate ( ),-- & '( *-,--- x (-.+J 7 (-.+/#

)L,-)L,--

),-),--

3oreign 'urrency Eayable to 1xchange =ro%er '(# 3oreign 'urrency !nits '(#

-,/--

'ash ?ollars @ecei$able from 1xchange =ro%er

)L,--

11-5#

-,/-)L,--


P11-24 P, II continued#

a.

.

2ournal entries for the fair $alue hedge of the firm commitment in 2apanese yen.

2uly ), ->; 3oreign 'urrency @ecei$able from 1xchange =ro%er P# ?ollars Eayable to 1xchange =ro%er (;,;-- & P;--,--- x (-.)-; 2uly ) forward rate August *-, ->; 3oreign 'urrency @ecei$able from 1xchange =ro%er P# 3oreign 'urrency Transaction 9ain (;,;- & P;--,--- x (-.)-;; Aug. *- forward rate (;,;-- & P;--,--- x (-.)-;- 2uly ) forward rate ( ;- & P;--,--- x (-.)-;; 7 (-.)-;-# 3oreign 'urrency Transaction Goss 3irm 'ommitment @ecord loss on financial instrument aspect of firm commitment: (;- & P;--,--- x (-.)-;; 7 (-.)-;-# 1quipment 3irm 'ommitment Accounts Eayable P# (;,--- & P;--,--- x (-.)-/ Aug. *- spot rate October L, ->; 3oreign 'urrency @ecei$able from 1xchange =ro%er P# 3oreign 'urrency Transaction 9ain (;*,--- & P;--,--- x (-.)-+- Oct. L spot rate 7 ;,;- & P;--,--- x (-.)-;; Aug. *- forward rate ( ;- & P;--,--- x (-.)-+- 7 (-.)-;;#

;,;-;,;--

;;-

;;-

;),;;;,---

;;-

?ollars Eayable to 1xchange =ro%er 'ash

;,;--

3oreign 'urrency !nits P# 3oreign 'urrency @ecei$able from 1xchange =ro%er P# (;*,--- & P;--,--- x (-.)-+ Oct. L spot rate

;*,---

11-$

;,;-;*,---



a.

*.

2ournal entries for the use of a forward contract to manage its foreign currency exposure in pounds. The forward contract is not designated as a hedge.

No$ember )+, ->; 3oreign 'urrency @ecei$able from 1xchange =ro%er Q# ?ollars Eayable to 1xchange =ro%er ()+,-- & Q)-,--- x ().+ No$. )+ forward rate

)+,-)+,--

?ecember *), ->; 3oreign 'urrency Transaction Goss 3oreign 'urrency @ecei$able from 1xchange =ro%er Q# ()+,/;- & Q)-,--- x ().+/; ?ec. *) forward rate 7 )+,-- & Q)-,--- x ().+ No$. )+ forward rate ( ;- & Q)-,--- x ().+/; 7 ().+#

;;-

2anuary );, ->+ 3oreign 'urrency Transaction Goss 3oreign 'urrency @ecei$able from 1xchange =ro%er Q# ()+,/-- & Q)-,--- x ().+/- 2an. ; spot rate )+,/;- & Q)-,--- x ().+/; ?ec. *) forward rate ( ;- & Q)-,--- x ().+/- 7 ().+/;#

b.

;;-

?ollars Eayable to 1xchange =ro%er 'ash

)+,--

3oreign 'urrency !nits Q# 3oreign 'urrency @ecei$able from 1xchange =ro%er Q#

)+,/--

)+,-)+,/--

Faple would report a net loss in ->; of (),)--, as follows: ->; Transaction ) Fay *- Eart I Fay *- Eart II

Goss

9ain

7 ),--

L-7

Transaction  Aug. *-, ->; K Eart II Oct. L, ->; K Eart I Oct. L, ->; K Eart II

;),--7

;7 ;-

7 ;-

-7

Transaction * ?ec. *), ->; Eart I ?ec. *), ->; Eart II ->;, Net Goss

),)--

11-1



c.

Faple would report a net loss in ->+, of ();-, as follows: ->+ Transaction * 2an. );, ->+ K Eart I 2an. );, ->+ K Eart II ->+, Net Goss

11-2

Goss

9ain

)-;-

7 7

);-

7-7


P11-25 U8&),8/. F*&/. C&' T,),'/*)

a.

Indirect exchange rates for Australian dollars were: ?ecember ), ->;: A(-,--- < (/,--- & ).++ () equals A().++ ?ecember *), ->;: A(-,--- < (/),-- & ).+L () equals A().+L

b.

The balance in the account 3oreign 'urrency Eayable to 1xchange =ro%er was (*L,L-- at ?ecember *), ->;, computed as: (*L,L-- & A(-,--- x (-.; ?ec. *) forward rate

c.

The direct exchange rate for the +-7day forward contract for the -,--- Australian dollars was A() & (-.;J. This is the result of the following computation: (/-,+-- < A(-,---# & (-.;J.

d.

(/-,+-- is the amount of ?ollars @ecei$able from 1xchange =ro%er in the ad6usted trial balance at ?ecember *), ->;. The balance in this account does not change because it is denominated in !.". dollars.

e.

Indirect spot exchange rates for "outh Rorean wons were: October : R@0/--,--- < (J-,--- & ; () equals R@0; ?ecember *): R@0/--,--- < (J-,J-- & /.L;- () equals R@0/.L;- Or, /.L;- & R@0) < (-.--

f.

The ?ollars Eayable to 1xchange =ro%er was (J,--- in both the ad6usted and unad6usted trial balances. The entry to record the forward contract for the /--,--"outh Rorean wons on October , ->;, appears below. Note that the account ?ollars Eayable to 1xchange =ro%er is denominated in !.". dollars and does not change as a result of exchange rate changes. 3oreign 'urrency @ecei$able from 1xchange =ro%er R@0# ?ollars Eayable to 1xchange =ro%er (#

g.

J,--J,---

The direct exchange rate for the )-7day forward contract in "outh Rorean wons on October , ->;, was (-.-;. This amount is determined in the following manner: (J,--- < R@0/--,--- & (-.-;. The (J,--- is the amount of the dollars payable to exchange bro%er. This amount is computed by using the forward rate.

11-3



h.

The accounts payable balance was (J-,J-- at ?ecember *), ->;. (J-,J-- & R@0/--,--- x (-.-- ?ec. *) spot rate The entries to support the computations for Eroblem ))7; are presented below. ).

Transactions with Australian company ?ecember ), ->; Accounts @ecei$able A(# "ales (/,--- & A(-,--- x ()
/,--/,---

?ollars @ecei$able from 1xchange =ro%er /-,+-3oreign 'urrency Eayable to 1xchange =ro%er A(# /-,+-(/-,+-- & A(-,--- x (-.;J ?ec. ) forward rate, and also dollar amount stated in problem information(-.;J & (/-,+-- < A(-,---# ?ecember *), ->) 3oreign 'urrency Transaction Goss *-Accounts @ecei$able A(# *-(*-- & change in accounts recei$able A(# as noted in problem information. 3oreign 'urrency Eayable to 1xchange =ro%er 3oreign 'urrency Transaction 9ain (*L,L-- & A(-,--- x (-.; ?ec. *) forward rate 7 /-,+-- & A(-,--- x (-.;J ?ec. ) forward rate ( -- & A(-,--- x (-.; 7 (-.;J# .

---

Transactions with "outh Rorean company October , ->; 1quipment Accounts Eayable R@0# (J-,--- & R@0/--,--- x (-.-

J-,--J-,---

3oreign 'urrency @ecei$able from 1xchange =ro%er R@0# J,--?ollars Eayable to 1xchange =ro%er J,--(J,--- & R@0/--,--- x (-.-;-, and the(J,--- is presented in the problem for the foreign currency recei$able. ?ecember *), ->; 3oreign 'urrency Transaction Goss Accounts Eayable R@0# (J-,J-- & R@0/--,--- x (-.- ?ec. *) spot rate 7 J-,--- & R@0/--,--- x (-.-- October  spot rate ( J-- & R@0/--,--- x (-.- 7 (-.--# 3oreign 'urrency Transaction Goss 3oreign 'urrency @ecei$able from 1xchange =ro%er (J),--- & R@0/--,--- x (-.-; ?ec. *) forward rate 7 J,--- & R@0/--,--- x (-.-;- Oct.  forward rate ( ),--- & R@0/--,--- x (-.-; 7 (-.-;-#

11-4

J-J--

),--),---


P11-26 M,'+/. & T&)

).

1

.



*.

3

/.

A

;.

I

+.

G

.

O

J.

=

L.

F

)-.

'

)).

N

).

R

)*.

2

)/.

9

);.

?

P11-2#B M/&-C+*/'& Q&)/*) * D&/=,/=&) ,8 H&8./. A'/=//&)

).

d

An underlying is a financial or physical $ariable.

.

c

*.

c

The net in$estment must be less than that required for other types.

/.

a

The change for fair $alue hedges goes to current earnings. The change for cash flow hedges goes to other comprehensi$e income.

;.

b

+.

c

Trading securities do not qualify for hedge accounting.

11-5


P11-2B

a.

A C,)+ F*< H&8.&: U)& *% , O/* * H&8.& , A/'/,&8 P'+,)&;

1ntry to record the purchase of the call options on No$ember *-, ->): No$ember *-, ->) Eurchased 'all Options -,-- 'ash -,--Eurchase call options for )-,--- barrels of oil at a premium of ( per barrel for Farch ), ->. The options are at the money of (*- per barrel therefore, the entire(-,--- is time $alue.

b.

Ad6usting entry on ?ecember *), ->): ?ecember *), ->) Goss on edge Acti$ity )/,--Eurchased 'all Options )/,--@ecord the decrease in the time $alue of the options to current earnings. Eurchased 'all Options )-,--Other 'omprehensi$e Income @ecord the increase in the intrinsic $alue of the options to other comprehensi$e income.

c.

)-,---

1ntries to record Farch ), ->, expiration of options, the sale of the options, and the purchase of oil: Farch ), -> Goss on edge Acti$ity +,--Eurchased 'all Options +,--@ecord the decrease in the time $alue of the options to current earnings. The options ha$e expired. Eurchased 'all Options -,--Other 'omprehensi$e Income @ecord the increase in the intrinsic $alue of the options to other comprehensi$e income. 'ash Eurchased 'all Options @ecord the sale of the call options.

-,---

*-,--*-,---

Oil In$entory **-,-- 'ash **-,--@ecord the purchase of )-,--- barrels of oil at the spot price of (** per barrel.

11-


P11-2B continued#

d.

2une ), ->, entries to record the sale of the oil and other entries: 2une ), -> 'ash "ales @ecord the sale of )-,--- barrels of oil at (*/ per barrel. 'ost of 9oods "old Oil In$entory @ecogni4e the cost of the oil sold.

*/-,--*/-,---

**-,--**-,---

Other 'omprehensi$e Income U @eclassification *-,--'ost of 9oods "old *-,--@eclassify into earnings the other comprehensi$e income from the cash flow hedge.

11-!


P11-2$B

a.

A F,/ @,& H&8.&: U)& *% , O/* * H&8.& A=,/,&-%*-S,& S&'//&);

No$ember *, ->, entries: No$ember *, -> A$ailable7for7"ale "ecurities 'ash Eurchase )-- shares of 2@" at () per share.

),-),--

Eut Option )- 'ash )-Eurchase put options for )-- shares of 2@" at () per share at a cost of ()--. b.

?ecember *), ->, entries to record re$aluations of stoc% and options: ?ecember *), -> Eut Option )-9ain on edge Acti$ity @ecord increase in intrinsic $alue of put options to current earnings

)--

Goss on edge Acti$ity )-A$ailable7for7"ale "ecurities )-@ecord decrease in fair $alue of hedged a$ailable7for7sale securities to current earnings, in accordance with FASB 133 (ASC 15" : ()-- & () 7 ())# x )-- shares Goss on edge Acti$ity Eut Option @ecord decrease in the time $alue of the options. c.

++-

1ntries for Farch *, ->*, to record exercise of the put option and the sale of securities: Farch *, ->* Eut Option ;9ain on edge Acti$ity @ecord increase in intrinsic $alue of put options to current earnings

;-

Goss on edge Acti$ity ;A$ailable7for7"ale "ecurities ;@ecord decrease in fair $alue of hedged a$ailable7for7sale securities to current earnings, in accordance with FASB 133 (ASC 15" : (;- & ()) 7 ()-.;-# x )-- shares

11-"


P11-2$B continued#

Goss on edge Acti$ity /Eut Option @ecord decrease in the time $alue of the options. The options ha$e now expired.

/-

'ash ),-Eut Option );A$ailable7for7"ale "ecurities ),-;1xercise the put option and sell securities at option price of () per share.

P11-3!B M,'+/. & T&)  H&8./. ,8 D&/=,/=&)

). G . 1 *. F /. ? ;. 9 +. I . A J. R L.  )-. N )). 3 ). = )*. 2 )/. O );. '

11-#


P11-31 D&&//. F/,'/, S,&& A*)

Transaction ) (-,--

 (-,--

* (-,--

In$entory

)L,J--

),---

),---

NA

Accounts Eayable

)L,+--

)L,+--

)L,+--

NA

3orward 'ontract @ecei$able

3oreign 'urrency 1xchange 9ain Goss#, net Other 'omprehensi$e Income 9ain Goss#, net

),--- 9 NA

NA ,-- 9

),--- 9 NA

/ (-,--

J-- 9 NA

'omputational support: 3orward 'ontract @ecei$able: (-,-- & M-,--- x ().-) )<*) forward rate In$entory: ()L,J-- & (),--- &

(),--- accounts payable less (),-- firm commitment M-,--- x ().-; ))<*- spot rate

Accounts Eayable: ()L,+-- & M-,--- x (-.LJ )<*) spot rate 3oreign 'urrency 1xchange 9ain or Goss#, net: Transaction ): (),--- & ( ),-- exchange gain on forward contract from change in forward rate from L<) to ))<*-: M-,--- x ().-* 7(-.L## 7 ),-- exchange loss on firm commitment for change in forward rate from L<) to ))<*-: M-,--- x ().-* 7(-.L## 7 /-- exchange loss on forward contract from change in forward rate from ))<*- to )<*): M-,--- x ().-) 7().-*## S ),/-- exchange gain on account payable for change in spot rate from ))<*- to )<*): M-,--- x (-.LJ 7().-;## Transaction : No net foreign currency exchange gain because FASB 13 (ASC 15" specifies an offset of the gain from the re$aluation of the account payable by an equal amount from other comprehensi$e income.

11-!$

Advanced Accounting Chapter 11 Solution Manual

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