chap011 ed 9 full jawaban ada

7/23/2019 Chap011 Ed 9 Full Jawaban Ada

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

CHAPTER 11

MULTINATIONAL ACCOUNTING: FOREIGN CURRENCY TRANSACTIONS ANDFINANCIAL INSTRUMENTS

ANSWERS TO QUESTIONS

Q11-1 Indirect and direct exchange rates differ by which currency is desired to beexpressed in another currency. An indirect exchange rate is the number of foreigncurrency units that may be obtained for one local currency unit. The indirect exchangerate has the foreign currency unit in the numerator. As a fraction, the indirectexchange rate is expressed as follows:

Number of foreign currency unitsOne 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 thenumerator the !.". dollar for the direct exchange rate for the !.". dollar#. As afraction, the direct exchange rate is expressed as follows:

Number of local currency unitsOne foreign currency unit

The indirect and direct exchange rates are in$ersely related and both state the samerelationship between two currencies.

Q11-2 The direct exchange rate can be calculated by ta%ing the in$erse of theindirect exchange rate. "uch a computation follows:

Number of foreign currency units & '().*+* 'anadian dollars#One local currency unit ().-- !.". dollars#

The in$erse of the indirect exchange rate is:

().-- !.". dollars#&

'().*+ 'anadian dollars# (-.*/-

Q11-3 0hen the !.". dollar strengthens against the 1uropean euro, imports from1urope into the !.". will be less expensi$e in !.". dollars. The direct exchange ratedecreases, indicating that it ta%es fewer dollars to acquire 1uropean euros.

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Q11-4 A foreign transaction is a transaction that does not in$ol$e the exchange ofcurrencies on the part of the reporting entity. An example of a foreign transaction isthe sale of equipment by a !.". company the reporting entity# to a 2apanese firmthat is denominated in !.". dollars.

A foreign currency transaction is a transaction that does in$ol$e the exchange ofcurrencies on the part of the reporting entity. An example of a foreign currency

transaction is the sale of equipment by a !.". company the reporting entity# to a2apanese firm that is denominated in 2apanese yen.

Q11-5 There are many types of economic factors that affect currency exchangerates, among which are the le$el of inflation, the balance of payments, changes ininterest rates and in$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 theinflation in 1urope.

Q11-6 Assets and liabilities denominated in a foreign currency are measuredaccording to the requirements in FASB 52for those arising from normal purchaseand sale transactions, and by FASB 133for forward exchange contracts and hedging

acti$ities. FASB 52specifies that the $aluation at the transaction date and eachsubsequent balance sheet date should be at the local currency equi$alent using thespot rate of exchange. 3orward exchange contracts are $alued at fair $alue, typicallyby using the forward rate for the remainder of the term of the forward contract.

Q11-7 3oreign currency transaction gains or losses are recogni4ed in the financialstatements in the period in which the exchange rate changes. These gains or lossesare reported on the income statement.

Q11- If the direct exchange rate increases, the "un 'ompany will experience aforeign currency transaction loss on its (--,--- account payable that isdenominated in 'anadian dollars. The increase in the direct exchange rate showsthat 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 exchangerates for foreign currencies are to )# use a forward contract to offset an exposedforeign currency position, # hedge a firm foreign currency commitment as a fair$alue hedge, *# hedge an anticipated foreign transaction as a cash flow hedge, or /#speculate in foreign currency mar%ets. One example of a !.". company hedgingagainst the ris% of changes in the exchange rates for foreign currencies is to use aforward exchange recei$able contract to partially offset the effects of changes in theexchange rates of the foreign currency liability.

Q11-1" An exposed net asset position occurs when a company5s trade recei$ablesand other assets denominated in a foreign currency are greater than its liabilitiesdenominated in that currency. An exposed net liability position occurs if a company5sliabilities denominated in a foreign currency exceed recei$ables denominated in thatcurrency.

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Q11-11 A difference usually exists between a currency5s spot rate and forward ratebecause of the different economic factors in$ol$ed in the determination of a future$ersus present rate of exchange. This difference is usually positi$e because ofuncertainty and conser$atism toward the future. 3or example, if inflation is assumedto 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 decreasingpurchasing 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.

Q11-12 a#0hen an exposed foreign currency position exists, either an exposed netasset or net liability position is created. The forward contract is $alued at fair $alue,usually by the forward exchange rate for the remainder of the term of the forwardcontract. The underlying payable or recei$able from the foreign currency transactionis $alued at the spot rate at the time of the transaction and ad6usted to the currentspot rate at each balance sheet date. b# 3or a hedge of an identifiable foreigncurrency commitment, both the financial instrument and the forward contract aspectsof the hedge are $alued at the forward rate. An account, termed firm commitment, iscreated during the term of the forward contract to recogni4e the change in $alue ofthe financial instrument aspect of the firm commitment. c# 3or a cash flow hedge of aforecasted transaction, the forward contract is $alued at the forward rate, but the

effecti$e portion of the change in the fair $alue of the forward contract is recogni4ed inother comprehensi$e income. The gain or loss on the remeasured foreign currencydenominated account payable or recei$able is offset from a reclassification of othercomprehensi$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 theforward contract7s term.

8ains or losses on these forward contracts are recogni4ed in income in the period inwhich they occur.

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Q11-13 a. A foreign currency recei$able from bro%er would be shown on thebalance sheet for the period $alued at its fair $alue by using the contracted amount offoreign currency multiplied by the forward rate.

b. A foreign currency transaction loss would be shown on the income statement atthe end of the period as a separate item in the 9Other9 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 9Other9 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 forwardexchange rate. This is the dollar amount agreed upon by the forward contract and willnot change during the term of the forward contract.

e. A premium on forward contract is not separately accounted for but rather isindirectly included in the gain or loss through the process of re$aluing the forwardcontract from its forward rate at the time the contract is entered into to its e$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$estment at their !.". dollar equi$alent $alue as of the balance sheet date. The !.".dollar equi$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 thebalance sheet for the period at the contracted amount of foreign currency multipliedby the current exchange rate. Note that FASB 52requires that the spot rate be usedfor foreign currencydenominated payables or recei$ables arising from normaloperating transactions, but that FASB 133requires that forward exchange contractsbe $alued using the forward rate.

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SOLUTIONS TO CASES

C11-1 E##$%&' (# C)*+,+, E.%)*+,$ R*&$'

a. The ma6or factors influencing the demand for the !.". dollar on the foreignexchange 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 ratesdecrease, the balance of payments becomes an increasingly high deficit, andalternati$e in$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$e andforeign buyers tend to increase their orders for !.". goods. 3or example,assume the !.". dollar wea%ened relati$e to a foreign currency unit 3'!# asfollows:

direct exchange rate & (.;- < ) 3'!after wea%ening & (.+- < ) 3'!

This would mean that a !.".manufactured machine selling for ()-,--- wouldcost the foreign customer -,--- 3'! before the wea%ening of the dollar()-,--- & -,--- 3'! x (.;-#. After the wea%ening of the dollar, this samemachine would cost the foreign customer )+,++ 3'! ()-,--- & )+,++ 3'! x(.+-#. This means a significant price reduction for the foreign buyer, therebyincreasing the foreign demand for the !.".manufactured machine.

# The opposite effect occurs for the !.". business firm as the dollar wea%ens.3oreignmade goods are now more expensi$e as it ta%es more dollars to acquireimports. 3or example, a foreignmade part selling for )- 3'! before thewea%ening costs the !.". company (;.-- (;.-- & )- 3'! x (.;-#. After thedollar wea%ens, the same part now costs the !.". company (+.-- (+.-- & )-

3'! x (.+-#. This increase of ().-- per part is due solely to the wea%ening ofthe !.". dollar relati$e to the foreign currency. Ne$ertheless, the !.". businessfirm is sub6ect to a $ery significant increase in the cost of its inputs.

c. As the dollar wea%ens, imports become more expensi$e for the !.". consumer. Inaddition, as in case b# abo$e, the !.".based manufacturer using foreignmadecomponents 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 foreignelements.

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C11-2 R$/(0&+, * F(0$,+ C00$+% T0*+'*%&(+ (+ &)$ F+*+%* S&*&$$+&'AICPA A*/&$

a. =ow should report a foreign exchange loss on its ->; income statement. Thisloss is calculated by ta%ing the number of pounds that are due in ->+ andmultiplying them by the change in the direct exchange rate from the transaction dateto 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$ember*-, ->;. The increase in the direct exchange rate means that more !.". dollarswould be needed to purchase pounds at ?ecember *), ->;, than at No$ember *-,->;. Therefore, a foreign currency transaction loss should be reported in ->;because the exchange rate changed during ->;. In addition, the accounts payabledenominated in pounds should be reported at the exchange rate at ?ecember *),->;. This means that the accounts payable recorded on No$ember *-, ->;, wouldha$e to be increased in order to reflect a wea%ening !.". dollar.

b. @eporting a foreign exchange loss in ->; is appropriate because, consistent withaccrual accounting, the exchange rate on ?ecember *), ->;, should be used to$alue the accounts payable denominated in pounds. =ow5s beliefs as to futureexchange rate mo$ements are excluded from the financial statements.

C11-3 C)*+,+, E.%)*+,$ R*&$'

Note to Teacher: 'urrency exchange rates may be found in a $ariety of places on theInternet. A good site is http:


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C11-3 continued#

In the period --/ through --;, the dollar wea%ened against the peso, butstrengthened in --+. Eexico7s economy is $ery $olatile because of its reliance on!.". trade and on its trade relations with countries such as =ra4il and Argentina.

C11-4 A%%(+&+, #(0 F(0$,+ C00$+% D$+(+*&$ A%%(+&' P**8$

E1EO

TO: Earie Famont, Eanager, Eardi 8ras audit

3rom: GGGGGGGGGGGGGG GGGGGGGGGGGGGGG, 'HA

@e: Eardi 8ras 'orporation7s 3oreign 'urrency Transactions

Our client, Eardi 8ras 'orporation, needs to change its method of accounting for theeffects of changes in the exchange rate for "wiss francs. 'urrently, any differencebetween the liability recorded when the merchandise is recei$ed and the amount thatis paid in !.". dollars# when the liability is settled is recorded by our client as anad6ustment to the cost of the in$entory purchased. owe$er, this difference is theresult of changes in the exchange rate for "wiss francs between the date of thein$entory purchase and the payment date and is not the result of changes in the priceof the merchandise.

Eardi 8ras7s purchases from the "wiss company are foreign currency transactionsthat result in Eardi 8ras recording a payable denominated in "wiss francs. Theliability is fixed in terms of the amount of "wiss francs that must be paid.

Eardi 8ras is recording the payable appropriately since they are using the exchangerate on the date of the in$entory purchase to con$ert the francs to dollars. This isconsistent with requirements in 3A"= "tatement No. ;. owe$er, the accounting forsubsequent changes in the !.". dollar equi$alent of the "wiss franc liability is notacceptable. @ather than an ad6ustment to the cost of in$entory, changes in theliability that result because of changes in the exchange rate between the !.". dollarand the "wiss franc must be recogni4ed as a foreign currency transaction gain or lossand must be included in net income in the period in which the rate change occurs.

Eardi 8ras should also be aware that any outstanding foreign currency payables atthe balance sheet date should be ad6usted to their !.". dollar equi$alent using theexchange rate in effect on the balance sheet date, with any resulting foreign currencytransaction gains or losses included in earnings of the current period.

?isclosure of the aggregate gain or loss from foreign currency transactions used indetermining net income for a gi$en period is also required.

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C11-4 continued#

Authoritati$e support for the abo$e memo can be found in the following references:

3A"= ;, Har. );, Har. )+, and Har. *-

"uggested Jueries:

exchange rateK changeKtransaction gainK disclos

C11-5 A%%(+&+, #(0 F(0$,+ C00$+% F(09*0 C(+&0*%&'

E1EO

To: Findsay 0illiams, Treasurer

3rom: GGGGGGGGGG GGGGGGGGGGG, 'HA, 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 firmcommitment that has both contractual rights and contractual obligations. The fixedprice of the firm commitment exposes the company to the fair $alue ris% of changes inthe price of the equipment. owe$er, because the purchase price is denominated ineuros, the contract also exposes the company to the ris% of changes in the $alue ofthe foreign currency. The company may enter into a deri$ati$e contract. 3A"="tatement No. ** allows such a deri$ati$e contract of a foreign currency exposure ofan unrecogni4ed firm commitment to be designated as a hedge.

If A$anti elects to use a forward exchange contract to fix the exchange rate topurchase euros, the company can designate the forward contract as a foreigncurrency fair $alue hedge of the foreign currency exposure in the firm commitment ifthere is formal documentation of the hedging relationship and the rationale for themanagement7s decision to use the hedge, and if the effecti$eness of the hedge isassessed 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 orloss on the hedge and the offsetting gain or loss on the hedged firm commitmentshould be recogni4ed in earnings in the same accounting period.

Therefore, during the commitment period, there will be no effect on the incomestatement the gain or loss on the deri$ati$e will be offset by the loss or gain on thefirm commitment.

After the equipment is deli$ered, a foreign currency denominated payable will berecorded and accounted for under 3A"= "tatement No. ;. Transaction gains orlosses on the foreign currency liability may continue to be offset by changes in the fair$alue of the forward contract.

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C11-5 continued#

Authoritati$e support for the memo can be found in the following references:

3A"= )**, Har. /, Har. / footnote#, 3A"= )**, Har. )Ld#, and 3A"= )**, Har. -

"uggested Jueries:

hedgK foreign currencK commitmentKhedgK accounting criteria

C11-6B A%%(+&+, #(0 H$,$' (# A**8$-#(0-S*$ S$%0&$'

E1EO

To: Ear% =ec%er, '3O

3rom: GGGGGGGGGGG GGGGGGGGGGGGGGG, 'HA, In$estment ?i$ision

@e: edge AccountingM=ond Hortfolio

The proposal has been made to use an interest rate futures contract to hedge theinterest rate ris% associated with @ainy ?ay7s portfolio of bond in$estments. Althoughthe use of the deri$ati$e may be expected to offset the changes in the $alue of thebond portfolio, the issue that must be considered is whether the use of this deri$ati$ewould qualify for hedge accounting under 3A"= "tatement No. )**. If hedgeaccounting cannot be used, the changes in the fair $alue of the futures contract willbe included in net income. owe$er, the changes in the fair $alue of the bondportfolio will continue to be reported as other comprehensi$e income, but not in netincome.

3A"= )** does allow a portfolio of similar assets or similar liabilities to be designatedas the hedged item under certain conditions. The change in $alue of any item in theportfolio 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 $alues ofthe indi$idual bonds within the portfolio respond to interest rate changes in aproportionate manner to the o$erall portfolio response. 8i$en the wide range ofmaturity 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 bondsof similar maturities into se$eral subportfolios and using multiple deri$ati$es to hedgethe interest rate ris% associated with each group of bond in$estments. Thissubdi$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 offsetby the changes in the fair $alue of the bond in$estment.

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C11-6Bcontinued#

Authoritati$e support for the abo$e memo can be found in the following references:

3A"= )**, Har. )L, Har. -, Har. ), Har, *3A"= ));, Har. )*, amended by 3A"= )*-, Har. *

"uggested Jueries:hedgK criteriaBa$ailableforsaleC

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SOLUTIONS TO E;ERCISES

E11-1 E.%)*+,$ R*&$'

a. Indirect exchange rates for pounds and dollars:().-- & .+; =ritish pounds ) pound < ().+-#

().-- & ).*;)/ 'anadian dollars ) 'anadian dollar < (./#

b. 3'! & (

&(L,---

& ;,--- =ritish pounds?irect 1xchange @ate ().+-

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

E11-2 C)*+,$' + E.%)*+,$ R*&$'

a. 1xchange rates:

Arri$al ?ate ?eparture ?ate

?irect

1xchange @ate

) florin & (.-

(-- < ),--- florins#

) florin & (.);

(); < )-- florins#

Indirect

1xchange @ate

().-- & ; florins

),--- florins < (--#

().-- & +.+ florins

)-- florins < ();#

b. The direct exchange rate has decreased. This means that the dollar hasstrengthened during Er. Alt5s $isit. 3or example, upon arri$al, Er. Alt had to pay(.- per each florin. !pon departure, howe$er, each florin is worth 6ust (.);. Thismeans that the relati$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 Foss ( ;

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

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E11-3 B*'% U+$0'&*++, (# F(0$,+ E./('0$

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

b.

"ettlement ?irect 1xchange @ate Indirect 1xchange @ateTransaction 'urrency Increases ?ecreases Increases ?ecreases

Importing ?ollar NA NA NA NAImporting F'! F 8 8 F1xporting ?ollar NA NA NA NA1xporting F'! 8 F F 8

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E11-4 A%%(+& B**+%$'

3oreign 'urrency !nits #

3rom recei$able:

;-,--- x (.;L# #


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E11-5 D$&$0++, Y$*0-E+ A%%(+& B**+%$' #(0 I/(0& *+ E./(0& T0*+'*%&(+'

Accounts@ecei$able

Accounts Hayable

3oreign 'urrencyTransaction

1xchange Foss

3oreign 'urrencyTransaction

1xchange 8ain

'ase ) NA ()+,---a# NA (,---b#

'ase (*L,---c# NA NA (,---d#

'ase * NA (,---e# (*,---f# NA

'ase / (+,;-g# NA (),;-h# NA

a# F'! /-,--- x (./-b# F'! /-,--- x (./- (./;#c# F'! -,--- x ().-d# F'! -,--- x ().- ().L-#e# F'! *-,--- x (.-

f# F'! *-,--- x (.- (.L-#g# F'! ,;--,--- x (.--;h# F'! ,;--,--- x (.--; (.--*#

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E11-6 T0*+'*%&(+' 9&) F(0$,+ C(/*+$'

a. Eay ) In$entory or Hurchases# L,/-- Accounts Hayable L,/-- 3oreign purchase denominated in !.". dollars.

2une - Accounts Hayable L,/-- 'ash L,/-- "ettle payable.

2uly ) Accounts @ecei$able )-,--- "ales )-,--- 3oreign sale denominated in !.". dollars.

August )- 'ash )-,--- Accounts @ecei$able )-,--- 'ollect recei$able.

b. Eay ) In$entory or Hurchases# L,/--

Accounts Hayable R# L,/-- 3oreign purchase denominated in yen: (L,/-- < (.--- & R),--,---

2une - 3oreign 'urrency Transaction Foss +-- Accounts Hayable R# +-- @e$alue foreign currency payable to !.". dollar equi$alent $alue: (,--- & R),--,--- x (.--; 2une - spot rate L,/-- & R),--,--- x (.--- Eay ) spot rate ( +-- & R),--,--- x (.--; (.---#

Accounts Hayable R# ,---

3oreign 'urrency !nits R# ,--- "ettle payable denominated in yen.

2uly ) Accounts @ecei$able =@F# )-,--- "ales )-,--- 3oreign sale denominated in =ra4ilian reals: ()-,--- < (.- & =@F;-,---

August )- Accounts @ecei$able =@F# ),--- 3oreign 'urrency Transaction 8ain ),--- @e$alue foreign currency recei$able to !.". dollar equi$alent $alue: ()),--- & =@F;-,--- x (. Aug. )- spot rate )-,--- & =@F;-,--- x (.- 2uly ) spot rate ( ),--- & =@F;-,--- x (. (.-#

3oreign 'urrency !nits =@F# )),--- Accounts @ecei$able =@F# )),--- @ecei$e =ra4ilian reals in settlement of recei$able.

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E11-7 F(0$,+ P0%)*'$ T0*+'*%&(+

a. ?enominated in "wiss francs@one Imports reports in !.". dollars

)) In$entory or Hurchases# )-,;-- Accounts Hayable "3r# )-,;-- ()-,;-- & "3r);,--- x (.-

?ecember *), ->) Accounts Hayable "3r# +-- 3oreign 'urrency Transaction 8ain +-- @e$alue foreign currency payable to equi$alent !.". dollar $alue: ( ,-- & "3r);,--- x (.++ ?ec. *) spot rate )-,;-- & "3r);,--- x (.- ?ec. ) spot rate ( +-- & "3r);,--- x (.++ (.-#

2anuary );, -> 3oreign 'urrency Transaction Foss *-- Accounts Hayable "3r# *-- @e$alue payable to current !.". dollar

equi$alent: ()-,-- & "3r);,--- x (.+L 2an. );, ->, $alue ,-- & "3r);,--- x (.++ ?ec. *), ->), $alue ( *-- & "3r);,--- x (.+L (.++#

Accounts Hayable "3r# )-,-- 3oreign 'urrency !nits "3r# )-,-- ()-,-- & "3r);,--- x (.+L

Accounts Hayable "3r#"3r);,--- x (.-# )


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E11- A+, $alue )-,)-- & R),---,--- x (.--L), ?ec. *) spot rate

( ;,--

b. Accounts @ecei$able 1S# ),-- 3oreign 'urrency Transaction 8ain ),-- Ad6ust recei$able denominated in 1gyptian Hounds to equi$alent !.". dollar $alue on settlement date: (L;,;-- & 1S/;,--- x (.)L- -> collection date $alue L*,+-- & 1S/;,--- x (.)+ ?ec. *), ->+, spot rate ( ),-- & 1S/;,--- x (.)L- (.)+#

'ash )+/,---3oreign 'urrency !nits 1S# L;,;--

Accounts @ecei$able 1S# L;,;-- Accounts @ecei$able (# )+/,--- 'ollect all accounts recei$able.

c. Accounts Hayable R# +,*-- 3oreign 'urrency Transaction 8ain +,*-- Ad6ust payable to equi$alent !.". dollar $alue on settlement date: ()+*,L-- & R),---,--- x (.--L -> payment date $alue )-,)-- & R),---,--- x (.--L) ?ec. *), ->+, spot rate ( +,*-- & R),---,--- x (.--L (.--L)#

Accounts Hayable (# L+,---Accounts Hayable R# )+*,L-- 3oreign 'urrency !nits R# )+*,L-- 'ash L+,--- Hayment of all accounts payable.

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E11- continued#

d. Transaction gain on 1S:?ecember *), ->+ ()-,--- gain?ecember *), -> ),-- gain O$erall ()),-- gain

e. Transaction gain on R:?ecember *), ->+ ( ;,-- gain?ecember *), -> +,*-- gain O$erall ()),;-- gain

f. O$erall foreign currency transactions gain:8ain on 1S transaction ()),--8ain on R transaction )),;--

(*,/--

'hocolate ?eFites could ha$e hedged its exposed position. The exposedpositions are only those denominated in foreign currency units. The accountsrecei$able denominated in 1S could be hedged by selling 1S in the forwardmar%et, thereby loc%ing in the $alue of the 1S. The accounts payabledenominated in R could be hedged by buying R in the forward mar%et, therebyloc%ing in the $alue of the R.

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E11-! P0%)*'$ 9&) F(09*0 E.%)*+,$ C(+&0*%&

*


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E11-1" P0%)*'$ 9&) F(09*0 E.%)*+,$ C(+&0*%& *+ I+&$0$++, F'%*Y$*0-E+

)

1quipment ;,-- Accounts Hayable "3r# ;,-- Hurchased equipment with payable denominated in "3r: (;,-- & "3r)/-,--- x (.+L spot rate

3oreign 'urrency @ecei$able from =ro%er "3r# *,L-- ?ollars Hayable to 1xchange =ro%er (# *,L-- "igned +-day forward exchange contract: (*,L-- & "3r)/-,--- x (.+ forward rate

?ecember *), ->3oreign 'urrency Transaction Foss ,L-- Accounts Hayable "3r# ,L-- @e$alue accounts payable to current !.". dollar equi$alent: (L,--- & "3r)/-,--- x (.- ?ec. *) spot rate ;,-- & "3r)/-,--- x (.+L ?ec. )+ spot rate ( ,L-- & "3r)/-,--- x (.- (.+L#

3oreign 'urrency @ecei$able from 1xchange =ro%er "3r# *,;-- 3oreign 'urrency Transaction 8ain *,;-- @e$alue foreign currency recei$able: (,*-- & "3r)/-,--- x (.+; ?ec. *) forward rate *,L-- & "3r)/-,--- x (.+ ?ec. )+ forward rate ( *,;-- & "3r)/-,--- x (.+; (.+#

11-2$


21/78


E11-1" continued#

3ebruary )/, ->L3oreign 'urrency Transaction Foss -- 3oreign 'urrency @ecei$able from 1xchange =ro%er "3r# -- @e$alue foreign currency recei$able to

current equi$alent !.". dollar $alue: (+,+-- & "3r)/-,--- x (.+ 3eb. )/, ->L, spot rate ,*-- & "3r)/-,--- x (.+; ?ec. *), ->, forward rate ( -- & "3r)/-,--- x (.+ (.+;#

Accounts Hayable "3r# ),/-- 3oreign 'urrency Transaction 8ain ),/-- @e$alue foreign currency accounts payable to current !.". dollar $alue: (+,+-- & "3r)/-,--- x (.+ 3eb. )/, ->L, spot rate L,--- & "3r)/-,--- x (.- ?ec. *), ->, spot rate ( ),/-- & "3r)/-,--- x (.+ (.-#

?ollars Hayable to 1xchange =ro%er (# *,L-- 'ash *,L-- Hay !.". dollars to exchange bro%er for forward contract.

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

Accounts Hayable "3r# +,+-- 3oreign 'urrency !nits "3r# +,+--

"ettle foreign currency payable.

b. Income statement effect for the year ended ?ecember *), ->:3oreign 'urrency 1xchange Foss with "wiss 'o.# (,L--#3oreign 'urrency 1xchange 8ain with =ro%er# *,;--Net effect on income ( --

c. O$erall effect of transactions:-> 3oreign 'urrency 8ain ( --->L 3oreign 'urrency Foss on recei$able --#->L 3oreign 'urrency Transaction 8ain on payable ),/--O$erall effect ( ),/--

11-21


22/78


E11-1" continued#

PART II: 3orward contract designated as a cash flow hedge.

?ecember )+, ->1quipment ;,-- Accounts Hayable "3r# ;,--

Hurchased equipment with payable denominated in "3r: (;,-- & "3r)/-,--- x (.+L spot rate

3oreign 'urrency @ecei$able from =ro%er "3r# *,L-- ?ollars Hayable to 1xchange =ro%er (# *,L-- "igned +-day forward exchange contract: (*,L-- & "3r)/-,--- x (.+ forward rate

?ecember *), ->3oreign 'urrency Transaction Foss ,L-- Accounts Hayable "3r# ,L--

@e$alue accounts payable to current !.". dollar equi$alent: (L,--- & "3r)/-,--- x (.- ?ec. *) spot rate ;,-- & "3r)/-,--- x (.+L ?ec. )+ spot rate ( ,L-- & "3r)/-,--- x (.- (.+L#

3oreign 'urrency @ecei$able from1xchange =ro%er "3r# *,;-- Other 'omprehensi$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:

(,*-- & "3r)/-,--- x (.+; ?ec. *) forward rate *,L-- & "3r)/-,--- x (.+ ?ec. )+ forward rate ( *,;-- & "3r)/-,--- x (.+; (.+#

Other 'omprehensi$e Income ,L-- 3oreign 'urrency Transaction 8ain ,L-- In accordance with FASB 13, an amount is reclassified from other comprehensi$e income to fully offset the foreign currency transaction loss on the re$aluation of the foreign currency denominated account payable.

11-22


23/78


E11-1" continued#

3ebruary )/, ->LOther '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= 3orward contract has now expired. (+,+-- & "3r)/-,--- x (.+ 3eb. )/, ->L, spot rate ,*-- & "3r)/-,--- x (.+; ?ec. *), ->, forward rate ( -- & "3r)/-,--- x (.+ (.+;#

Accounts Hayable "3r# ),/-- 3oreign 'urrency Transaction 8ain ),/-- @e$alue foreign currency accounts payable to current !.". dollar $alue using the spot rate in accordance with 3A"= ;:

(+,+-- & "3r

)/-,--- x (.+ 3eb. )/, ->L, spot rate L,--- & "3r)/-,--- x (.- ?ec. *), ->, spot rate ( ),/-- & "3r)/-,--- x (.+ (.-#

3oreign 'urrency Transaction Foss ),/-- Other 'omprehensi$e Income ),/-- In accordance with FASB 13, an amount is reclassified from other comprehensi$e income to fully offset the foreign currency transaction gain on the re$aluation of the foreign currency denominated account payable.

?ollars Hayable to 1xchange =ro%er (# *,L--

'ash *,L-- Hay !.". dollars to exchange bro%er for forward contract.

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

Accounts Hayable "3r# +,+-- 3oreign 'urrency !nits "3r# +,+-- "ettle foreign currency payable.

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

11-23


24/78


E11-11 F(0$,+ C00$+% T0*+'*%&(+' AICPA A*/&$

). d ->) ->(./L; x *-,--- ()/,+L; (./L/; x *-,--- ()/,;*;(./L/; x *-,--- )/,;*; (.//; x *-,--- )/,L*;

8ain ( );- Foss ( *--#

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

*. d ()-,--- & 2uly ), ->), !.". dollar equi$alent $alue()/-,--- & ?ecember *), ->), !.". dollar equi$alent $alue

F'! L/-,--- < ()/-,---# & F'! + < ())-;,--- & 2uly ), ->, !.". dollar equi$alent $alue F'! L/-,--- < L# & ()-;,---(*;,---# 3oreign currency transaction loss

/. c '() < (.- '().)) & ().--#

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

+. d

. d

11-24


25/78


E11-12 S*$ + F(0$,+ C00$+%

a. October ) ?ecember ) April )

Transaction =alance "heet "ettlement ?ate ?ate ?ate

?irectexchangerates H) & (.--+L (.--L (.--+

?ollar ?ollar0ea%ened "trengthened

rate increased# rate decreased#

b. October ), ->+Accounts @ecei$able H# */,--- "ales @e$enue */,---

"old equipment with recei$able denominated in pesetasH#: (*/,--- & H;,---,--- x (.--+L

?ecember *), ->+Accounts @ecei$able H# ;,--- 3oreign 'urrency Transaction 8ain ;,--- @e$alue foreign currency recei$able to current !.". dollar equi$alent: (*,--- & H;,---,--- x (.--L ?ec. *) spot rate */,--- & H;,---,--- x (.--+L Oct. ) spot rate ( ;,--- & H;,---,--- x (.--L (.--+L#

April ), ->3oreign 'urrency Transaction Foss ),--- Accounts @ecei$able H# ),--- @e$alue foreign recei$able to current !.". dollar equi$alent: (*L,--- & H;,---,--- x (.--+ April ) spot rate *,--- & H;,---,--- x (.--L ?ec. *) spot rate ( ),--- & H;,---,--- x (.--+ (.--L#

3oreign 'urrency !nits H# *L,--- Accounts @ecei$able H# *L,--- 'ollect foreign recei$able: (*L,--- & H;,---,--- x (.--+

c. Net foreign currency transaction gain & (/,---October ) to ?ecember *) & (;,--- gain2anuary ) to April ) & ),---# loss

(/,--- gain

Hroof: (/,--- & H;,---,--- x (.--+ (.--+L#

11-25


26/78


E11-13 S*$ 9&) F(09*0 E.%)*+,$ C(+&0*%&

April - 2une )

Transaction ?ate "ettlement ?ate

M @ecei$able in%ronor M @ecei$e %ronor fromrecei$able M "ign 31' todeli$er

M 'omplete 31' with deli$ery of

%ronor %ronor

3orward rate: "Dr) & (.)+"pot rate: "Dr) & (.)- "Dr ) & (.)+;

a. April -Accounts @ecei$able "Dr# */,--- "ales @e$enue */,---

(*/,--- & "Dr

--,--- x (.) spot rate

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

2une )3oreign 'urrency Transaction Foss ),--- Accounts @ecei$able "Dr# ),---

@e$alue foreign currency recei$able to current equi$alent !.". dollar $alue: (**,--- & "Dr--,--- x (.)+; 2une ) spot rate */,--- & "Dr--,--- x (.)- April - spot rate ( ),--- & "Dr--,--- x (.)+; (.)-#

3oreign 'urrency Hayable to 1xchange=ro%er "Dr# /-- 3oreign 'urrency Transaction 8ain /-- @e$alue foreign currency payable to current !.". dollar $alue: (**,--- & "Dr--,--- x (.)+; 2une ) spot rate **,/-- & "Dr--,--- x (.)+ April - forward rate ( /-- & "Dr--,--- x (.--

11-2


27/78


E11-13 continued#

3oreign 'urrency !nits "Dr# **,--- Accounts @ecei$able "Dr# **,---@ecei$e %ronor from foreign recei$able:

(**,--- & "Dr--,--- x (.)+; spot rate

3oreign 'urrency Hayable to 1xchange =ro%er "Dr# **,--- 3oreign 'urrency !nits "Dr# **,---Hay 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.

b. 1ffects on net income:

!se of forward contract: )# ?ollar strengthened from April - to 2une ) 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 netincome thus, net income was higher as a result of acquiring the forward contract.

11-2!


28/78


E11-14 F(0$,+ C00$+% T0*+'*%&(+' AICPA A*/&$

). c (/,---

Accounts Hayable #--,--- x (./L;# )


29/78


E11-14 continued#

*. c (;,---Accounts @ecei$able 3'!#

)-), when the order was recei$ed.

/. b (),---

Accounts Hayable 3'!#

)-,--- x (.+-# /* A21 ;--

)-,--- x (.;;# )/ A21 ),---

)-,--- x (./;# *


30/78


E11-14 continued#

;. 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 inpesos when the indirect exchange rate was () & - pesos. On ?ecember *),

->;, the indirect exchange rate was () & ) pesos, meaning that the dollarstrengthened and the peso wea%ened. Therefore, a foreign currencytransaction gain would be reported for ->;. This gain would be included innet income before extraordinary items.

+. b 3oreign currency transaction gains and losses are reported on the incomestatements of !.". companies when recei$ables and payables aredenominated in foreign currencies. "ince Fouis did not report any foreignexchange gains or losses, the payable to the 8erman company wasdenominated in !.". dollars, not 1uropean euros.

. b (,--- & *--,--- pounds x ().+; ().+#. The foreign currency transactiongain is computed using spot rates on the transaction date No$ember *-,

->;# and the balance sheet date ?ecember *), ->;#. The forwardexchange rates are not used because the transaction was not hedged.

11-3$


31/78


E11-15 S*$ 9&) F(09*0 C(+&0*%& *+ F'%* Y$*0-E+

Eay )/ 2une *- 2uly )*

Transaction ?ate =alance "heet "ettlement ?ate

?ateM "ale with recei$able M 'ollect recei$abledenominated in guilders in guilders

M 1nter into +-day 31' M 'omplete 31' withto deli$er guilders deli$ery of guilders

3orward rate:8) & (.;/) 8) & (.;*-

"pot rate:8) & (.;*- 8) & (.;*/ 8) & (.;;

a.

). Eay )/Accounts @ecei$able 8# +,;-- "ales @e$enue +,;-- 3oreign currency sale: (+,;-- & 8;-,--- x (.;*-

. Eay )/?ollars @ecei$able from 1xchange=ro%er ,-;- 3oreign 'urrency Hayable to 1xchange =ro%er 8# ,-;- "igned +-day forward contract to deli$er guilders:

(,-;- & 8;-,--- x (.;/) forward rate

*. 2une *-Accounts @ecei$able 8# -- 3oreign 'urrency Transaction 8ain -- @e$alue foreign currency recei$able to endofperiod !.". dollar equi$alent using spot rate according to FASB 52: (+,-- & 8;-,--- x (.;*/ 2une *- spot rate +,;-- & 8;-,--- x (.;*- Eay )/ spot rate ( -- & 8;-,--- x (.;*/ (.;*-#

3oreign 'urrency Hayable to 1xchange =ro%er 8# ;;- 3oreign 'urrency Transaction 8ain ;;- @e$alue foreign currency payable to yearend fair $alue using forward rate according to FASB 133: (+,;-- & 8;-,--- x (.;*- 2une *- forward rate ,-;- & 8;-,--- x (.;/) Eay )/ forward rate ( ;;- & 8;-,--- x (.-))

11-31


32/78


E11-15 continued#

/. 2uly )*3oreign 'urrency Transaction Foss /;- Accounts @ecei$able 8# /;- @e$alue foreign currency recei$able to !.". dollar equi$alent on settlement date:

(+,;- & 8

;-,--- x (.;; 2uly )* spot rate +,-- & 8;-,--- x (.;*/ 2une *- spot rate ( /;- & 8;-,--- x (.;; (.;*/#

3oreign 'urrency !nits 8# +,;- Accounts @ecei$able 8# +,;- 'ollect foreign currency recei$able.

;. 2uly )*3oreign 'urrency Hayable to 1xchange =ro%er 8# ;- 3oreign 'urrency Transaction 8ain ;- @e$alue foreign currency payable to

fair $alue at settlement date using spot rate because the term of the contract has expired: (+,;- & 8;-,--- x (.;; 2uly )* spot rate +,;-- & 8;-,--- x (.;*- 2une *- forward rate ( ;- & 8;-,--- x (.--;

3oreign 'urrency Hayable to 1xchange=ro%er 8# +,;- 3oreign 'urrency !nits 8# +,;- Hay guilders to exchange bro%er.

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

@ecei$e dollars from exchange bro%er for guilders deli$ered: (,-;- & 8;-,--- x (.;/) rate established in forward contract signed on Eay )/.

b. 2une *-3'T gain on account from Netherlands 'ompany (--3'T gain on account to =ro%er ;;-Net increase in net income for 3U1 2une *- (;-

11-32


33/78


E11-15 continued#

c. 2uly )*3'T loss on account recei$ablefrom Netherlands 'ompany (/;-#3'T gain on account to =ro%er ;-Net decrease in net income

for the period from ) to )* (--#Net increase in net income for the 3U1 +*- ;-O$erall gain on transaction ( ;;-

d. Eay )/ M 2une *- gain ( --2uly ) M 2uly )* loss /;-#O$erall loss if forward contract not used (;-#

11-33


34/78


E11-16A H$,$ (# * P0%)*'$ 'ommitment without and with Time Value of Eoney'onsideration#

))


35/78


E11-16A continued#

?ecember *), ->+3oreign 'urrency @ecei$able from1xchange =ro%er S# -- 3oreign 'urrency Transaction 8ain -- @e$alue foreign currency recei$able to

endofperiod fair $alue: (/L,+-- & S*-,--- x ().+ ?ec. *) forward rate /,-- & S*-,--- x ().; No$. ) forward rate ( -- & S*-,--- x ().+ ().;#

3oreign 'urrency Transaction Foss -- 3irm 'ommitment -- @ecord the loss on the firm commitment: (-- & S*-,--- x ().+ ().;#

2anuary *-, ->3oreign 'urrency Transaction Foss +-- 3oreign 'urrency @ecei$able from

1xchange =ro%er S# +-- @e$alue foreign currency recei$able to current !.". dollar equi$alent: (/L,--- & S*-,--- x ().+- 2an. *- forward rate /L,+-- & S*-,--- x ().+ ?ec. *) forward rate ( +-- & loss, S*-,--- x ().+- ().+#

3irm 'ommitment +-- 3oreign 'urrency Transaction 8ain +-- @ecord the gain on the financial instrument aspect of the firm commitment: (+-- & S*-,--- x ().+- ().+#

In$entory or Hurchases# /,/--3irm 'ommitment *-- Accounts Hayable S# /,-- @ecord foreign currency account payable at spot rate and recogni4e change in $alue of the firm commitment as ad6ustment of purchase price: (/,-- & S*-,--- x ().; 2an. *- spot rate

11-35


36/78


E11-16A continued#

Earch ), ->3oreign 'urrency Transaction Foss /;- 3oreign 'urrency @ecei$able from 1xchange =ro%er S# /;- @e$alue foreign currency recei$able to

fair $alue: (/,;;- & S*-,--- x ().;L; Ear. ) spot rate /L,--- & S*-,--- x ().+- 2an. *- forward rate ( /;- & S*-,--- x ().;L; ().+-#

Accounts Hayable S# );- 3oreign 'urrency Transaction 8ain );- @e$alue foreign payable to equi$alent !.". dollar $alue: ();- & S*-,--- x ().;L; ().;#

?ollars Hayable to 1xchange =ro%er (# /,-- 'ash /,--

?eli$er !.". dollars to exchange bro%er in accordance with forward exchange contract: (/,-- & S*-,--- x ().; forward rate

3oreign 'urrency !nits S# /,;;- 3oreign 'urrency @ecei$able from 1xchange =ro%er S# /,;;- @ecei$e *-,--- pounds from exchange bro%er: (/,;;- & S*-,--- x ().;L; Ear. ) spot rate

Accounts Hayable S# /,;;- 3oreign 'urrency !nits S# /,;;-

"ettle foreign currency payable with *-,--- pounds recei$ed from bro%er.

11-3


37/78


E11-16A continued#

c. 'onsidering the time $alue of money in $aluing the forward contract.

No$ember ), ->+3oreign 'urrency @ecei$able from1xchange =ro%er S# /,--

?ollars Hayable to 1xchange =ro%er (# /,-- "igned )-day forward contract to hedge foreign currency commitment: (/,-- & S*-,--- x ().; forward rate

?ecember *), ->+3oreign 'urrency @ecei$able from1xchange =ro%er S# LL 3oreign 'urrency Transaction 8ain LL @e$alue foreign currency recei$able to discounted endofperiod fair $alue: (/L,+-- & S*-,--- x ().+ ?ec. *) forward rate

/,-- & S*-,--- x ().; No$. ) forward rate ( -- & S*-,--- x ().+ ().;# ( LL & NHV .) x


38/78


E11-16A continued#

In$entory or Hurchases# /,/-*3irm 'ommitment Accounts Hayable S# /,-- @ecord foreign currency account payable at spot rate and recogni4e change in $alue of

the firm commitment as ad6ustment of purchase price: (/,-- & S*-,--- x ().; 2an. *- spot rate

Earch ), ->3oreign 'urrency Transaction Foss // 3oreign 'urrency @ecei$able from 1xchange =ro%er S# // @e$alue foreign currency recei$able to fair $alue: (/,;;- & S*-,--- x ().;L; Ear. ), ->, spot rate /,-- & S*-,--- x ().; No$. ), ->+, forward rate

( );- & cumulati$e, undiscounted loss o$er term of forward contract & pre$iously recogni4ed net gain ( // & loss for period

Accounts Hayable S# );- 3oreign 'urrency Transaction 8ain );- @e$alue foreign currency payable to equi$alent !.". dollar $alue: ();- & S*-,--- x ().;L; ().;#

?ollars Hayable to 1xchange =ro%er (# /,-- 'ash /,--

?eli$er !.". dollars to exchange bro%er in accordance with forward exchange contract: (/,-- & S*-,--- x ().; forward rate

3oreign 'urrency !nits S# /,;;- 3oreign 'urrency @ecei$able from 1xchange =ro%er S# /,;;- @ecei$e *-,--- pounds from exchange bro%er: (/,;;- & S*-,--- x ().;L; Ear. ) spot rate

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

11-3"


39/78


E11-17 G*+ (0 L('' (+ S/$%*&$ F(09*0 E.%)*+,$ C(+&0*%&

)) income:

?ecember *), ->) )-,--- x (.;+ & ( +,--?ecember ), ->) )-,--- x (.;L & +,+--"peculation gain in ->) ( ,/--#

b. 1ffects of speculation on -> income:

Earch ), -> )-,--- x (.; & ( +L,/--?ecember *), ->) )-,--- x (.;+ & +,--"peculation loss in -> ( ),--

3oreign 'urrency Hayable #

)


40/78


E11-1 S/$%*&(+ + * F(0$,+ C00$+%

)-)3oreign 'urrency @ecei$able from1xchange =ro%er R# *;,--- ?ollars Hayable to 1xchange =ro%er (# *;,--- "ign )L-day forward contract to recei$e

;-,---,--- yen: (*;,--- & R;-,---,--- x (.--; forward rate

?ecember *), ->)3oreign 'urrency @ecei$able from1xchange =ro%er R# ;,--- 3oreign 'urrency Transaction 8ain ;,--- @e$alue speculati$e forward contract to equi$alent endofperiod !.". dollar $alue using forward rate on ?ec. *): (*L-,--- & R;-,---,--- x (.--+ ?ec. *) forward rate for Ear. *), ->, settlement

*;,--- & R;-,---,--- x (.--; Oct. ) forward rate for Ear. *), ->, settlement ( ;,--- & R;-,---,--- x (.--+ (.--;#

Earch *), ->3oreign 'urrency Transaction Foss -,--- 3oreign 'urrency @ecei$able from 1xchange =ro%er R# -,--- @e$alue speculati$e forward contract to current date, the end of the contract term, using Earch *) spot rate: (*+-,--- & R;-,---,--- x (.-- Ear. *)

spot rate *L-,--- & R;-,---,--- x (.--+ ?ec. *) forward rate for Ear. *), -> ( -,--- & R;-,---,--- x (.-- (.--+#

?ollars Hayable to 1xchange =ro%er (# *;,--- 'ash *;,--- ?eli$er !.". dollars to exchange bro%er.

11-4$


41/78


E11-1 continued#

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

'ash *+-,--- 3oreign 'urrency !nits R# *+-,--- Trade yen for dollars, at ban%.

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

11-41


42/78


E11-1! F(09*0 E.%)*+,$ T0*+'*%&(+' AICPA A*/&$

). a (/-- & )-,--- foreign currency units x (.L (.L#. The loss is calculatedusing only forward rates. On ?ecember *), ->;, the loss is the differencebetween the -day future rate on No$ember ) (.L# and the *-day futurerate on ?ecember *) (.L#.

. c (),--- & ;-,--- 1uropean euros x (./ (.#. The loss is calculated usingonly forward rates. On "eptember *-, ->;, the loss is the difference betweenthe +-day future rate of (./ on "eptember ) and the *-day future rate of(. on "eptember *-, ->;.

*. b Eanage an exposed position:Value the forward exchange contract 31'# at its fair $alue, measured bychanges in the forward exchange rate 31@#. Note that the question as%s onlyfor the effect on income from the forward contract transaction thus, any effecton income from the foreign currency denominated account payable is notincluded in the answer.

31@, )


43/78


SOLUTIONS TO PROBLEMS

P11-2" M&/$-C)(%$ Q$'&(+' (+ F(0$,+ C00$+% T0*+'*%&(+'

))L3oreign 'urrency @ecei$able from1xchange =ro%er @enminbi# ),+-- ?ollars Hayable to 1xchange =ro%er (# ),+-- "igned -day forward exchange contract to purchase )--,--- renminbi: (),+-- & )--,--- renminbi x (.)+ forward rate

. c ?ecember *), ->L3oreign 'urrency @ecei$able from1xchange =ro%er @enminbi# *-- 3oreign 'urrency Transaction 8ain *-- @e$alue foreign currency recei$able to fair $alue: (*-- & )--,--- renminbi x (.) (.)+#

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

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

11-43


44/78


P11-2" continued#

;. a 2anuary *-, ->3oreign 'urrency Transaction Foss -- 3oreign 'urrency @ecei$able from 1xchange =ro%er @enminbi# -- Ad6ust foreign currency recei$able to

current !.". dollar equi$alent: (),-- & )--,--- renminbi x (.) 2an. *- spot rate ),-- & )--,--- renminbi x (.) ?ec. *) forward rate ( -- & )--,--- renminbi x (.) (.)#

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

11-44


45/78


P11-21 F(0$,+ S*$'

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

(),--- & ?%r)-,--- x (.);

2uly *Accounts @ecei$able ?%r# *+ 3oreign 'urrency Transaction 8ain *+ @e$alue foreign currency recei$able to !.". dollar equi$alent $alue: (),-*+ & ?%r)-,--- x (.);* 2uly * spot rate ),--- & ?%r)-,--- x (.);- 2une + spot rate ( *+ & ?%r)-,--- x (.);* (.);-#

3oreign 'urrency !nits ?%r# ),-*+ Accounts @ecei$able ?%r# ),-*+

'ollect accounts recei$able in ?%r.

. 2uly Accounts @ecei$able S# /,/-- "ales @e$enue /,/-- 3oreign sale and foreign currency recei$able: (/,/-- & S*-,--- x ().;L

?ollars @ecei$able from1xchange =ro%er (# /L,-- 3oreign 'urrency Hayable to 1xchange =ro%er S# /L,--

"igned +-day forward contract to sell pounds: (/L,-- & S*-,--- x ().+* forward rate

"eptember -Accounts @ecei$able S# +- 3oreign 'urrency Transaction 8ain +- @e$alue foreign currency recei$able: (/L,*+- & S*-,--- x ().+) "ept. - spot rate /,/-- & S*-,--- x ().;L 2uly spot rate ( +- & S*-,--- x ().+) ().;L#

11-45


46/78


P11-21 continued#

3oreign 'urrency Hayable to 1xchange =ro%er S# ;/- 3oreign 'urrency Transaction 8ain ;/- @e$alue foreign currency payable: (/L,*+- & S*-,--- x ().+) "ept. - spot rate

/L,-- & S*-,--- x ().+*- 2uly forward rate ( ;/- & S*-,--- x ().+) ().+*-#

3oreign 'urrency !nits S# /L,*+- Accounts @ecei$able S# /L,*+- @ecei$e pounds from customer.

3oreign 'urrency Hayable to1xchange =ro%er S# /L,*+- 3oreign 'urrency !nits S# /L,*+- ?eli$er pounds to bro%er.

'ash /L,--

?ollars @ecei$able from 1xchange =ro%er (# /L,-- @ecei$e !.". dollars from bro%er in accordance with forward contract.

*. 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 Hayable to 1xchange =ro%er '(# ;),)-- "ign +-day forward contract to sell 'anadian dollars: (;),)-- & '(-,--- x (.*- forward rate

11-4


47/78


P11-21 continued#

No$ember )-3oreign 'urrency Transaction Foss )- Accounts @ecei$able '(# )- @e$alue foreign currency recei$able to equi$alent !.". dollar $alue:

(;),/- & '(-,--- x (.* No$. )- spot rate ;),/;- & '(-,--- x (.*; Oct. )) spot rate ( )- & '(-,--- x (.* (.*;#

3oreign 'urrency Transaction Foss )/- 3oreign 'urrency Hayable to 1xchange =ro%er '(# )/- @e$alue foreign currency payable: (;),/- & '(-,--- x (.* No$. )- spot rate ;),)-- & '(-,--- x (.*- Oct. )) forward rate ( )/- & '(-,--- x (.* (.*-#

3oreign 'urrency !nits '(# ;),/-

Accounts @ecei$able '(# ;),/- @ecei$e 'anadian dollars from customer: (;),/- & '(-,--- x (.* No$. )- spot rate.

3oreign 'urrency Hayable 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.

11-4!


48/78


P11-22 F(0$,+ C00$+% T0*+'*%&(+'

). 2anuary );Accounts @ecei$able ,/-- "ales @e$enue ,/-- 3oreign export denominated in !.". dollars.

Earch );'ash ,/-- Accounts @ecei$able ,/-- 'ollect recei$able from "outh Dorean firm.

. Earch LIn$entory or Hurchases# )),+- Accounts Hayable I@S# )),+- 3oreign in$entory purchase with payable denominated in foreign currency: ()),+- & I@S,--- x ().+L

Eay )

Accounts Hayable I@S# )/- 3oreign 'urrency Transaction 8ain )/- @e$alue foreign currency payable to current !.". dollar equi$alent: ()),+- & I@S,--- x ().++ Eay ) spot rate )),+- & I@S,--- x ().+L Ear. L spot rate ( )/- & I@S,--- x ().++ ().+L#

8lobe "hipping must settle the payable in foreign currency units. 3oreign currencyunits or foreign currency drafts chec%s written in terms of foreign currency units#may be obtained from most ma6or ban%s.

Accounts Hayable I@S# )),+- 3oreign 'urrency !nits I@S# )),+- "ettlement of foreign currency payable: ()),+- & I@S,--- x ().++ Eay ) spot rate

11-4"


49/78


P11-22 continued#

*. Eay )3oreign 'urrency @ecei$able from1xchange =ro%er NT(# *,--L ?ollars Hayable to 1xchange =ro%er (# *,--L "igned )-day forward contract to hedge

a foreign currency commitment: (*,--L & NT(L-,--- x (.-*+ forward rate

August )3oreign 'urrency @ecei$able from1xchange =ro%er NT(# )+ 3oreign 'urrency Transaction 8ain )+ @e$alue foreign currency recei$able to fair $alue (*,-/ & NT(L-,--- x (.-*L Aug. ) forward rate *,--L & NT(L-,--- x (.-*+ Eay ) forward rate ( )+ & NT(L-,--- x (.-*L (.-*+#

3oreign 'urrency Transaction Foss )+

3irm 'ommitment )+ @ecord the loss on the financial statement aspect of the firm commitment: ()+ & NT(L-,--- x (.-*L (.-*+#

In$entory or Hurchases# ,L/3irm 'ommitment )+ Accounts Hayable NT(# *,--- @eceipt of goods and ad6ustment of in$entory cost by deferrals: (*,--- & NT(L-,--- x (.-*; Aug. ) spot rate

11-4#


50/78


P11-22 continued#

"eptember 3oreign 'urrency Transaction Foss /L 3oreign 'urrency @ecei$able from 1xchange =ro%er NT(# /L @e$alue foreign currency recei$able to

fair $alue: (,+ & NT(L-,--- x (.-* "ept. spot rate *,-/ & NT(L-,--- x (.-*L Aug. ) forward rate ( /L & NT(L-,--- x (.-* (.-*L#

Accounts Hayable NT(# / 3oreign 'urrency Transaction 8ain / @e$alue foreign currency payable: (/ & NT(L-,--- x (.-* (.-*;#

?ollars Hayable to 1xchange =ro%er (# *,--L 'ash *,--L ?eli$er !.". dollars to forward

exchange bro%er.

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

Accounts Hayable NT(# ,+ 3oreign 'urrency !nits NT(# ,+ "ettle foreign currency payable.

11-5$


51/78


P11-22 continued#

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

2uly +?ollars @ecei$able from1xchange =ro%er (# L,--- 3oreign 'urrency Hayable to 1xchange =ro%er # L,--- "igned +-day forward contract to deli$er euros: (L,--- & );-,--- x (.;L- forward rate

"eptember /3oreign 'urrency Transaction Foss ,;- Accounts @ecei$able # ,;-

@e$alue foreign currency recei$able to equi$alent !.". dollar $alue: (L,;- & );-,--- x (.;L; "ept. / spot rate -,--- & );-,--- x (.+-- 2une + spot rate ( ,;- & );-,--- x (.;L; (.+--#

3oreign 'urrency Transaction Foss ;- 3oreign 'urrency Hayable to 1xchange =ro%er # ;- @e$alue foreign currency payable for loss since 2uly +: (L,;- & );-,--- x (.;L; "ept. / spot rate L,--- & );-,--- x (.;L- 2uly + forward rate

( ;- & );-,--- x (.;L; (.;L-#

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

3oreign 'urrency Hayable to 1xchange=ro%er # L,;- 3oreign 'urrency !nits # L,;- ?eli$er euros to exchange bro%er.

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

11-51


52/78


P11-23A C(/0$)$+'$ P0(8$: F(0 U'$' (# F(09*0 E.%)*+,$C(+&0*%&' 9&)(& *+ 9&) T$ >*$ (# M(+$ C(+'$0*&(+'

a. !se of forward contract to manage foreign currency ris% of exposed foreigncurrency position. Not designated as a hedge.

))3oreign 'urrency Transaction Foss ),--- Accounts Hayable A(# ),--- @e$alue foreign currency payable to equi$alent !.". dollar $alue: (+),--- & A()--,--- x (.+)- ?ec. *) spot rate +-,--- & A()--,--- x (.+-- ?ec. ) spot rate ( ),--- & A()--,--- x (.+)- (.+--#

3oreign 'urrency @ecei$able from1xchange =ro%er A(# *-- 3oreign 'urrency Transaction 8ain *-- @e$alue foreign currency recei$able: (+),-- & A()--,--- x (.+) ?ec. *) forward rate +-,-- & A()--,--- x (.+- ?ec. ) forward rate ( *-- & A()--,--- x (.+) (.+-#

P11-23A continued#

11-52


53/78


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

Earch *), ->3oreign 'urrency Transaction Foss ),--- 3oreign 'urrency @ecei$able from 1xchange =ro%er A(# ),---

@e$alue foreign currency recei$able: (+-,-- & A()--,--- x (.+- Ear. *), ->, spot rate +),-- & A()--,--- x (.+) ?ec. *), ->), forward rate ( ),--- & A()--,--- x (.+- (.+)#

Accounts Hayable A(# L-- 3oreign 'urrency Transaction 8ain L-- @e$alue foreign currency payable: (+-,-- & A()--,--- x (.+- Ear. *), ->, spot rate +),--- & A()--,--- x (.+)- ?ec. *), ->), spot rate ( L-- & A()--,--- x (.+- (.+)-#

?ollars Hayable to 1xchange =ro%er (# +-,-- 'ash +-,-- ?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 (.+- Ear. *) spot rate.

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

11-53


54/78


P11-23A continued#

b. !se of forward contract as fair $alue hedge of foreign currency firm commitment.

)


55/78


P11-23A continued#

2anuary *-, ->3oreign 'urrency Transaction Foss -- 3oreign 'urrency @ecei$able from 1xchange =ro%er A(# -- @e$alue foreign currency recei$able to

current !.". dollar equi$alent: (+-,;-- & A()--,--- x (.+-; 2an. *-, ->, forward rate +),-- & A()--,--- x (.+) ?ec. *), ->), forward rate ( -- & A()--,--- x (.+-; (.+)#

3irm 'ommitment -- 3oreign 'urrency Transaction 8ain -- @ecord the gain on the financial instrument aspect of the firm commitment: (-- & A()--,--- x (.+-; (.+)#

In$entory or Hurchases# +),-- 3irm 'ommitment /--

Accounts Hayable A(# +-,L-- Acquire furniture initially committed to on ?ecember ), ->): (+-,L-- & A()--,--- x (.+-L spot rate

11-55


56/78


P11-23A continued#

Earch *), ->3oreign 'urrency Transaction Foss *-- 3oreign 'urrency @ecei$able from 1xchange =ro%er A(# *-- @e$alue foreign currency recei$able:

(+-,-- & A()--,--- x (.+- Ear. *) spot rate +-,;-- & A()--,--- x (.+-; 2an. *- forward rate ( *-- & A()--,--- x (.+- (.+-;#

Accounts Hayable A(# +-- 3oreign 'urrency Transaction 8ain +-- @e$alue foreign currency payable: (+-,-- & A()--,--- x (.+- Ear. *) spot rate +-,L-- & A()--,--- x (.+-L 2an. *- spot rate ( +-- & A()--,--- x (.+- (.+-L#

?ollars Hayable to 1xchange =ro%er (# +-,-- 'ash +-,--

?eli$er !.". dollars to exchange bro%er.

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 (.+- Ear. *) spot rate.

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

11-5


57/78


P-11-23A ?%(+&+$@

c. !se of forward contract as cash flow hedge of forecasted foreigncurrency transaction.

)


58/78


P11-23A continued#

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 +),-- & A()--,--- x (.+) ?ec. *), ->), forward rate ( -- & A()--,--- x (.+-; (.+)#

In$entory or Hurchases# +-,L-- Accounts Hayable A(# +-,L-- Acquire furniture and $alue at spot rate: (+-,L-- & A()--,--- x (.+-L spot rate

11-5"


59/78


P11-23A continued#

Earch *), ->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 (.+- Ear. *) spot rate +-,;-- & A()--,--- x (.+-; 2an. *- forward rate ( *-- & A()--,--- x (.+- (.+-;#

Accounts Hayable A(# +-- 3oreign 'urrency Transaction 8ain +-- @e$alue foreign currency payable using spot rate and recogni4ing change into current earnings as specified by FASB 52: (+-,-- & A()--,--- x (.+- Ear. *) spot rate

+-,L-- & A()--,--- x (.+-L 2an. *- spot rate ( +-- & A()--,--- x (.+- (.+-L#

3oreign 'urrency Transaction Foss +-- Other 'omprehensi$e Income +-- In accordance with FASB 13, reclassify amount from O'I sufficient to completely offset the foreign currency transaction gain on the foreign currency payable A(# that was hedged with a deri$ati$e designated as a cash flow hedge.

?ollars Hayable to 1xchange =ro%er (# +-,--

'ash +-,-- ?eli$er !.". dollars to exchange bro%er.

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 (.+- Ear. *) spot rate.

Accounts Hayable 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$eIncome. This balance will be reclassified into earnings at the time the in$entory issold which is the completion of the earnings process of the purchase of thein$entory.

11-5#


60/78


P11-23A continued#

d. 3orward contract used for speculati$e purposes only.

))3oreign 'urrency @ecei$able from1xchange =ro%er A(# *-- 3oreign 'urrency Transaction 8ain *-- @e$alue foreign currency recei$able to equi$alent !.". dollar $alue: (+),-- & A()--,--- x (.+) ?ec. *) forward rate +-,-- & A()--,--- x (.+- ?ec. ) forward rate

( *-- & A()--,--- x (.+) (.+-#

Earch *), ->3oreign 'urrency Transaction Foss ),--- 3oreign 'urrency @ecei$able from 1xchange =ro%er A(# ),--- @e$alue foreign currency recei$able: (+-,-- & A()--,--- x (.+- Ear. *), ->, spot rate +),-- & A()--,--- x (.+) ?ec. *), ->), forward rate ( ),--- & A()--,--- x (.+- (.+)#

?ollars Hayable to 1xchange =ro%er (# +-,-- 'ash +-,-- ?eli$er !.". dollars to forward exchange bro%er.

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

11-$


61/78


P11-23A continued#

e. !se of forward contract to manage exposed foreign currency position, consideringthe time $alue of money at a ) percent annual rate. 3orward contract notdesignated as a hedge.

))3oreign 'urrency Transaction Foss ),--- Accounts Hayable A(# ),--- @e$alue foreign currency payable to equi$alent !.". dollar $alue: (+),--- & A()--,--- x (.+)- ?ec. *) spot rate +-,--- & A()--,--- x (.+-- ?ec. ) spot rate ( ),--- & A()--,--- x (.+)- (.+--#

3oreign 'urrency @ecei$able from1xchange =ro%er A(# ) 3oreign 'urrency Transaction 8ain ) @e$alue foreign currency recei$able: (+),-- & A()--,--- x (.+) ?ec. *) forward rate +-,-- & A()--,--- x (.+- ?ec. ) forward rate ( *-- & A()--,--- x (.+) (.+-# cumulati$e, undiscounted gain from ?ec. ) ( ) & NHV .) x *


62/78


P11-23A continued#

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

Earch *), ->3oreign 'urrency Transaction Foss ) 3oreign 'urrency @ecei$able from

1xchange =ro%er A(# ) @e$alue foreign currency recei$able: (+-,-- & A()--,--- x (.+- Ear. *), ->, spot rate +-,-- & A()--,--- x (.+- ?ec. ), ->), forward rate ( --# & cumulati$e, undiscounted loss o$er term of forward contract ) & gain pre$iously recogni4ed on ?ec. *), ->) ( )# & change in fair $alue this period

Accounts Hayable A(# L-- 3oreign 'urrency Transaction 8ain L-- @e$alue foreign currency payable: (+-,-- & A()--,--- x (.+- Ear. *), ->, spot rate

+),--- & A()--,--- x (.+)- ?ec. *), ->), spot rate ( L-- & A()--,--- x (.+- (.+)-#

?ollars Hayable to 1xchange =ro%er (# +-,-- 'ash +-,-- ?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 (.+- Ear. *) spot rate.

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

11-2


63/78


P11-24 F(0$,+ P0%)*'$' *+ S*$' T0*+'*%&(+' *+ H$,+,

P*0& Ia. 2ournal entries for Eaple5s import and export transactions during

->; and ->+:

). Earch ), ->;

Accounts @ecei$able '(# ),;-- "ales ),;-- (),;-- & '(*-,--- x (.+; spot rate

Eay *-, ->;Accounts @ecei$able '(# -- 3oreign 'urrency Transaction 8ain -- (-- & '(*-,--- x (.+L .+;#

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

'ash -,/-- 3oreign 'urrency !nits '(# -,/--

. 2uly ), ->;No entry is recorded when the contract to purchaseequipment is signed.

August *-, ->;1quipment ;,--- Accounts Hayable R# ;,--- (;,--- & R;--,--- x (.)-/

October , ->;3oreign 'urrency Transaction Foss ),--- Accounts Hayable R# ),--- (),--- & R;--,--- x (.)-+ (.)-/#

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

Accounts Hayable R# ;*,--- 3oreign 'urrency !nits R# ;*,---

11-3


64/78


P11-24 continued#

*. No$ember )+, ->;In$entory )+,;-- Accounts Hayable S# )+,;-- ()+,;-- & S)-,--- x ().+;

?ecember *), ->;Accounts Hayable S# -- 3oreign 'urrency Transaction 8ain -- (-- & S)-,--- x ().+* ().+;#

2anuary );, ->+3oreign 'urrency Transaction Foss )-- Accounts Hayable S# )-- ()-- & S)-,--- x ().+/ ().+*#

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

Accounts Hayable S# )+,/-- 3oreign 'urrency !nits S# )+,/--

b. Eaple should report a foreign currency transaction gain of ()-- on its incomestatement 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 --Fess foreign currency transaction loss from

transaction denominated in yen ),---#3oreign currency transaction gain for ->; ( )--

11-4


65/78


P11-24 continued#

P*0& II

a. ). 2ournal entries for the use of a forward contract to manage theforeign currency exposure of the sale in 'anadian dollars:

Earch ), ->;?ollars @ecei$able from 1xchange =ro%er ),-- 3oreign 'urrency Hayable to ),-- 1xchange =ro%er '(# (),-- & '(*-,--- x (.+/ forward rate

Eay *-, ->;3oreign 'urrency Transaction Foss ),-- 3oreign 'urrency Hayable to 1xchange =ro%er '(# ),-- (-,/-- & '(*-,--- x (.+L Eay *- spot rate ),-- & '(*-,--- x (.+/ Earch ) forward rate ( ),-- & '(*-,--- x (.+L (.+/#

3oreign 'urrency Hayable to 1xchange=ro%er '(# -,/-- 3oreign 'urrency !nits '(# -,/--

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

11-5


66/78


P11-24 P*0& II continued#

a. . 2ournal entries for the fair $alue hedge of the firmcommitment in 2apanese yen.

2uly ), ->;3oreign 'urrency @ecei$able from

1xchange =ro%er R# ;,;-- ?ollars Hayable to 1xchange =ro%er ;,;-- (;,;-- & R;--,--- x (.)-; 2uly ) forward rate

August *-, ->;3oreign 'urrency @ecei$able from 1xchange=ro%er R# ;- 3oreign 'urrency Transaction 8ain ;- (;,;- & R;--,--- x (.)-;; Aug. *- forward rate (;,;-- & R;--,--- x (.)-;- 2uly ) forward rate ( ;- & R;--,--- x (.)-;; (.)-;-#

3oreign 'urrency Transaction Foss ;-

3irm 'ommitment ;- @ecord loss on financial instrument aspect of firm commitment: (;- & R;--,--- x (.)-;; (.)-;-#

1quipment ;),;-3irm 'ommitment ;- Accounts Hayable R# ;,--- (;,--- & R;--,--- x (.)-/ Aug. *- spot rate

October , ->;3oreign 'urrency @ecei$able from1xchange =ro%er R# ;-

3oreign 'urrency Transaction 8ain ;- (;*,--- & R;--,--- x (.)-+- Oct. spot rate ;,;- & R;--,--- x (.)-;; Aug. *- forward rate ( ;- & R;--,--- x (.)-+- (.)-;;#

?ollars Hayable to 1xchange =ro%er ;,;-- 'ash ;,;--

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

11-


67/78



a. *. 2ournal entries for the use of a forward contract to manage its foreigncurrency exposure in pounds. The forward contract is not designated as ahedge.

No$ember )+, ->;

3oreign 'urrency @ecei$able from1xchange =ro%er S# )+,-- ?ollars Hayable to 1xchange =ro%er )+,-- ()+,-- & S)-,--- x ().+ No$. )+ forward rate

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

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

?ollars Hayable to 1xchange =ro%er )+,-- 'ash )+,--

3oreign 'urrency !nits S# )+,/-- 3oreign 'urrency @ecei$able from

1xchange =ro%er S# )+,/--

b. Eaple would report a net loss in ->; of (),)--, as follows:

->; Foss 8ainTransaction )

Eay *- Hart I --Eay *- Hart II ),--

Transaction Aug. *-, ->; M Hart II ;- ;-Oct. , ->; M Hart I ),--- Oct. , ->; M Hart II ;-

Transaction *?ec. *), ->; Hart I --?ec. *), ->; Hart II ;-

->;, Net Foss ),)--

11-!


68/78



c. Eaple would report a net loss in ->+, of ();-, as follows:

->+ Foss 8ain

Transaction *

2an. );, ->+ M Hart I )-- 2an. );, ->+ M Hart II ;-

->+, Net Foss );- -

11-"


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P11-25 U+$0'&*++, F(0$,+ C00$+% T0*+'*%&(+'

a. Indirect exchange rates for Australian dollars were:?ecember ), ->;: A(-,--- < (/,--- & ).++ P() equals A().++Q?ecember *), ->;: A(-,--- < (/),-- & ).+ P() equals A().+Q

b. The balance in the account 3oreign 'urrency Hayable to 1xchange =ro%er was

(*,-- at ?ecember *), ->;, computed as:(*,-- & A(-,--- x (.; ?ec. *) forward rate

c. The direct exchange rate for the +-day forward contract for the-,--- Australiandollars was A() & (.;L. This is the result of the following computation:(/-,+-- < A(-,---# & (.;L.

d. (/-,+-- is the amount of ?ollars @ecei$able from 1xchange =ro%er in the ad6ustedtrial balance at ?ecember *), ->;. The balance in this account does not changebecause it is denominated in !.". dollars.

e. Indirect spot exchange rates for "outh Dorean wons were: October : D@0/--,--- < (L-,--- & ; P() equals D@0;Q

?ecember *): D@0/--,--- < (L-,L-- & /.;- P() equals D@0

/.;-Q Or, /.;- & D@0) < (.--

f. The ?ollars Hayable to 1xchange =ro%er was (L,--- in both the ad6usted andunad6usted trial balances. The entry to record the forward contract for the /--,---"outh Dorean wons on October , ->;, appears below. Note that the account?ollars Hayable to 1xchange =ro%er is denominated in !.". dollars and does notchange as a result of exchange rate changes.

3oreign 'urrency @ecei$able from1xchange =ro%er D@0# L,--- ?ollars Hayable to 1xchange =ro%er (# L,---

g. The direct exchange rate for the )-day forward contract in "outh Dorean wons onOctober , ->;, was (.-;. This amount is determined in the following manner:(L,--- < D@0/--,--- & (.-;. The (L,--- is the amount of the dollars payableto exchange bro%er. This amount is computed by using the forward rate.

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P11-25 continued#

h. The accounts payable balance was (L-,L-- at ?ecember *), ->;.(L-,L-- & D@0/--,--- x (.-- ?ec. *) spot rate

chap011 ed 9 full jawaban ada

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