Clayton Industries sells medical equipment worldwide. On March 1 of the current year, the company sold equipment, with a cost of $160,000, to a foreign customer for 200,000 euros payable in 60 days. At the same time, the company purchased a forward contract to sell 200,000 euros in 60 days. In another transaction, the company committed, on March 15, to deliver equipment in May to a foreign customer in exchange for 300,000 euros payable in June. This equipment is anticipated to have a completed cost of $210,000. On March 15, the company hedged the commitment by acquiring a forward contract to sell 300,000 euros in 90 days. Changes in the value of the commitment are based on changes in forward rates, and all discounting is based on a 6% discount rate. Assume all hedges are accounted for as fair value hedges and that the spot-forward difference is included in the assessment of hedge effectiveness. Various spot and forward rates for the euro are as follows:   Spot Rate Forward Rate for 60 Days from March 1 Forward Rate for 90 Days from March 15 March 1. . . . March 15 . . March 31 . . . April 30 . . . . $1.180 1.181 1.179 1.175 $1.181 1.180 1.178     $1.179 1.177 1.174 For individual months of March and April, calculate the income statement effect of: 1. The foreign currency transaction. 2. The hedge on the foreign currency transaction. 3. The foreign currency commitment. 4. The hedge on the foreign currency commitment.

FINANCIAL ACCOUNTING
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ISBN:9781259964947
Author:Libby
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Chapter1: Financial Statements And Business Decisions
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Clayton Industries sells medical equipment worldwide. On March 1 of the current year, the company sold equipment, with a cost of $160,000, to a foreign customer for 200,000 euros payable in 60 days. At the same time, the company purchased a forward contract to sell 200,000 euros in 60 days. In another transaction, the company committed, on March 15, to deliver equipment in May to a foreign customer in exchange for 300,000 euros payable in June. This equipment is anticipated to have a completed cost of $210,000. On March 15, the company hedged the commitment by acquiring a forward contract to sell 300,000 euros in 90 days. Changes in the value of the commitment are based on changes in forward rates, and all discounting is based on a 6% discount rate. Assume all hedges are accounted for as fair value hedges and that the spot-forward difference is included in the assessment of hedge effectiveness. Various spot and forward rates for the euro are as follows:

  Spot Rate Forward Rate for 60 Days from March 1 Forward Rate for 90 Days from March 15

March 1. . . .

March 15 . .

March 31 . . .

April 30 . . . .

$1.180

1.181

1.179

1.175

$1.181

1.180

1.178

 

 

$1.179

1.177

1.174

For individual months of March and April, calculate the income statement effect of:
1. The foreign currency transaction.
2. The hedge on the foreign currency transaction.
3. The foreign currency commitment.
4. The hedge on the foreign currency commitment.

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