10) Exercise A-8 (Static) Derivatives; foreign currency; cash flow hedge [LOA-4] Cleveland Company is a U.S. firm with a U.S. dollar functional currency that manufactures copper-related products. It forecasts that it will sell 5,000 feet of copper tubing to one of its largest customers at a price of ¥50,000,000. Although this sale has not been firmly committed, Cleveland expects that the sale will occur in six months on June 30, 2022. Thus, Cleveland is exposed to changes in foreign currency exchange rates. To reduce this exposure, Cleveland enters into a six-month foreign currency exchange forward contract with a third-party dealer on January 1, 2022, to deliver ¥ and receive US$. The foreign exchange contract has the following terms: Contract amount: ¥50,000,000 Maturity date: June 30, 2022 Forward contract rate: ¥105.00 = US $1.00 Yen / US$ Exchange rates: Date Spot rate Forward rate for June 30 January 1 ¥100.00/US $1.00 ¥105.00/US $1.00 March 31 ¥102.00/US $1.00 ¥108.00/US $1.00 June 30 ¥110.00/US $1.00 Cleveland obtains the fair values of the forward exchange contract from the third-party dealer. January 1 March 31 June 30 Swap fair value $ 0 $ 12,900 $ 21,645 Required: 1. Calculate the net settlement on June 30, 2022. 2. Prepare the journal entries for the period January 1 to June 30, 2022, to record the forward contract, necessary adjustments for changes in fair value, and settlement.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

10) Exercise A-8 (Static) Derivatives; foreign currency; cash flow hedge [LOA-4]

Cleveland Company is a U.S. firm with a U.S. dollar functional currency that manufactures copper-related products. It forecasts that it will sell 5,000 feet of copper tubing to one of its largest customers at a price of ¥50,000,000. Although this sale has not been firmly committed, Cleveland expects that the sale will occur in six months on June 30, 2022. Thus, Cleveland is exposed to changes in foreign currency exchange rates. To reduce this exposure, Cleveland enters into a six-month foreign currency exchange forward contract with a third-party dealer on January 1, 2022, to deliver ¥ and receive US$. The foreign exchange contract has the following terms:

Contract amount:    ¥50,000,000
Maturity date:                   June 30, 2022
Forward contract rate:      ¥105.00 = US $1.00

Yen / US$ Exchange rates:

Date	Spot rate	Forward rate for June 30
January 1	¥100.00/US $1.00	¥105.00/US $1.00
March 31	¥102.00/US $1.00	¥108.00/US $1.00
June 30	¥110.00/US $1.00

Cleveland obtains the fair values of the forward exchange contract from the third-party dealer.

	January 1	March 31	June 30
Swap fair value	$	0		$	12,900	$	21,645

Required:
1. Calculate the net settlement on June 30, 2022.
2. Prepare the journal entries for the period January 1 to June 30, 2022, to record the forward contract, necessary adjustments for changes in fair value, and settlement.

Expert Solution