Forward exchange contract designated as a fair value hedge of a foreign-currency-denominated firm commitment to sell inventory, weakening SUSOur U.S.-based company enters into a "firm commitment" with Malta-based retailer on November 10, 2018. The firm commitment requires our company to sell 70,000units of an inventory item costing €12.00 each to the Maltese company. Our company is contractually committed to ship the inventory (i.e., title transfers) on February10, 2019, with payment in Euros on the same date. Our company does recurring business with the Maltese company, and the firm commitment includes significantmonetary penalties for nonperformance. Also assume, on November 10, 2018, our company enters into a contract with a foreign currency exchange broker to sell Euros(for settlement on February 10, 2019) to mitigate the risk of exchange rate fluctuation. Our company's functional currency is the U.S. dollar and our forward exchangecontract qualifies as a fair value hedge. The relevant exchange rates and related balances for the period from November 10, 2018, to February 10, 2019, are as follows:Derivative-ForwardDateNovember 10, 2018December 31, 2018February 10, 2019*For settlement on February 10, 2019Ignore discounting in the computation of fair values.Date11/10/18 No entrya. Prepare the journal entries to record the sale and all adjustments required for the firm commitment and forward contract at November 10, 2018, December 31, 2018,and February 10, 2019.2/10/19 CashSpot RateSale(SUS - €1) Transaction1.211.251.30 $1,092,000Note: If no entry is required, select "No entry" as your answers under Description and leave the debit and credit answers blank (zero).Hedged TransactionNo entry12/31/18 Hedged firm commitment (asset)SalesSalesFV HedgeDate11/10/18 No entry+To record sale of inventory.Hedged firm commitment (asset)SalesDescriptionNo entry12/31/18 SalesSalesHedged firm commitment (asset) +To reclassify firm commitment.2/10/19 SalesForwardRate FV Asset(SUS - €1) (Liability)1.231.281.30+To record change in value.DescriptionForward contract (liabil수 ✓+ ✓✓Forward contract (liability)Forward contract (liability)CashTo record change in value.# ✓# ✓# ✓+To record the net settlement.$(42,000) $(42,000)(58,800) (16,800)✔Debit✔1,092,000✔0✔0✔42,000 ✓0✓016,800 ✓058,800 ✓0✔DebitChangein FV0✔042,000 ✓016,800 ✓058,800 ✓0Credit0042,000✔01,092,000✔0✓16,800✔0✓58,800 ✓Credit0✔00✓42,0000 ✓16,800✔058,800 ✓ b. Reconcile to the forward rate at the forward contract's inception the net cash received for both the sale of goods and the settlement of the forward-contract derivative.Net cash received for sale of goods and settlement of the forward contract derivative is:$ 1,033,200c. What amount of sales was recognized in the quarter ending December 31, 2018?Note: Do not use a negative sign with any of your answers below.$ 168,000 xWhat amount of sales was recognized in the quarter ending March 31, 2019?$ 504,000xWhat is the total amount of sales recognized across the quarters ending December 31, 2018, and March 31, 2019?$ 672,000X

Revenue is recognized upon delivering the goods or services to the customers. The accounting…

Forward exchange contract designated as a fair value hedge of a foreign-currency-denominated firm commitment to sell inventory, weakening SUS Our U.S.-based company enters into a "firm commitment" with Malta-based retailer on November 10, 2018. The firm commitment requires our company to sell 70,000 units of an inventory item costing €12.00 each to the Maltese company. Our company is contractually committed to ship the inventory (i.e., title transfers) on February 10, 2019, with payment in Euros on the same date. Our company does recurring business with the Maltese company, and the firm commitment includes significant monetary penalties for nonperformance. Also assume, on November 10, 2018, our company enters into a contract with a foreign currency exchange broker to sell Euros (for settlement on February 10, 2019) to mitigate the risk of exchange rate fluctuation. Our company's functional currency is the U.S. dollar and our forward exchange contract qualifies as a fair value hedge. The relevant exchange rates and related balances for the period from November 10, 2018, to February 10, 2019, are as follows: Derivative-Forward Date November 10, 2018 December 31, 2018 February 10, 2019 For settlement on February 10, 2019 Ignore discounting in the computation of fair values. a. Prepare the journal entries to record the sale and all adjustments required for the firm commitment and forward contract at November 10, 2018, December 31, 2018, and February 10, 2019. Date 11/10/18 No entry Note: If no entry is required, select "No entry" as your answers under Description and leave the debit and credit answers blank (zero). Hedged Transaction 2/10/19 Cash No entry 12/31/18 Hedged firm commitment (asset) Sales Sales Forward Rate Spot Rate Sale FV Asset Change (SUS - €1) Transaction (SUS-1) (Liability) in FV 1.21 1.25 1.30 $1,092,000 2/10/19 Sales FV Hedge Date 11/10/18 No entry Hedged firm commitment (asset) Sales 12/31/18 Sales Description No entry Hedged firm commitment (asset) Sales To record sale of inventory. 1.23 1.28 $(42,000) $(42,000) 1.30 (58,800) (16,800) To record change in value. Description Forward contract (iability) To reclassily firm commitment. + Forward contract (liability) Forward contract (liability) Cash To record change in value. ✔ + ✓ ✓ To record the net settlement. Debit 0✓ 0✔ 42,000 ✓ 0✓ 1,092,000✔ 0✔ 16,800 ✓ 0✔ 58,800 ✓ 0✓ Debit 0✔ 0✔ 42,000 ✓ 0✔ 16,800✔ 0✔ 58,800 ✓ 0✓ Credit 0✓ 0✓ 42,000✔ 0✓ 1,092,000 ✓ 0✓ 16,800✔ 58,800✔ Credit 0✓ 0✓ 0✓ 42,000✔ 0✓ 16,800✔ 0✓ 58,800✔

Forward exchange contract designated as a fair value hedge of a foreign-currency-denominated firm commitment to sell inventory, weakening SUS Our U.S.-based company enters into a "firm commitment" with Malta-based retailer on November 10, 2018. The firm commitment requires our company to sell 70,000 units of an inventory item costing €12.00 each to the Maltese company. Our company is contractually committed to ship the inventory (i.e., title transfers) on February 10, 2019, with payment in Euros on the same date. Our company does recurring business with the Maltese company, and the firm commitment includes significant monetary penalties for nonperformance. Also assume, on November 10, 2018, our company enters into a contract with a foreign currency exchange broker to sell Euros (for settlement on February 10, 2019) to mitigate the risk of exchange rate fluctuation. Our company's functional currency is the U.S. dollar and our forward exchange contract qualifies as a fair value hedge. The relevant exchange rates and related balances for the period from November 10, 2018, to February 10, 2019, are as follows: Derivative-Forward Date November 10, 2018 December 31, 2018 February 10, 2019 For settlement on February 10, 2019 Ignore discounting in the computation of fair values. a. Prepare the journal entries to record the sale and all adjustments required for the firm commitment and forward contract at November 10, 2018, December 31, 2018, and February 10, 2019. Date 11/10/18 No entry Note: If no entry is required, select "No entry" as your answers under Description and leave the debit and credit answers blank (zero). Hedged Transaction 2/10/19 Cash No entry 12/31/18 Hedged firm commitment (asset) Sales Sales Forward Rate Spot Rate Sale FV Asset Change (SUS - €1) Transaction (SUS-1) (Liability) in FV 1.21 1.25 1.30 $1,092,000 2/10/19 Sales FV Hedge Date 11/10/18 No entry Hedged firm commitment (asset) Sales 12/31/18 Sales Description No entry Hedged firm commitment (asset) Sales To record sale of inventory. 1.23 1.28 $(42,000) $(42,000) 1.30 (58,800) (16,800) To record change in value. Description Forward contract (iability) To reclassily firm commitment. + Forward contract (liability) Forward contract (liability) Cash To record change in value. ✔ + ✓ ✓ To record the net settlement. Debit 0✓ 0✔ 42,000 ✓ 0✓ 1,092,000✔ 0✔ 16,800 ✓ 0✔ 58,800 ✓ 0✓ Debit 0✔ 0✔ 42,000 ✓ 0✔ 16,800✔ 0✔ 58,800 ✓ 0✓ Credit 0✓ 0✓ 42,000✔ 0✓ 1,092,000 ✓ 0✓ 16,800✔ 58,800✔ Credit 0✓ 0✓ 0✓ 42,000✔ 0✓ 16,800✔ 0✓ 58,800✔

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter9: Operating Activities

Section: Chapter Questions

Problem 22PC

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