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QUESTION 3 Assume that on January 1, 202X, Company A entered into a definitive agreement to acquire Target Company in an all-cash transaction with cash payments to be made to the selling shareholders of the Target Company in a foreign currency when the transaction closes. Company A believes that the acquisition of Target Company is probable of occurring and expects to close the transaction and make the payments to the selling shareholders on September 30, 202X. In order to hedge the foreign currency exchange rate risk associated with this transaction, Company A, on January 1, 202X, also entered into a forward contract to acquire the foreign currency and sell its functional currency with a settiment date corresponding to the date that the company expects to close the acquisition. Assume that the notional amount of this forward contact is equal to the aggregate amount of the foreign currency that the company expects to pay when it closes the acquisition. Assume further that the fair value of the forward exchange contract was zero when it was entered into and is $20,000 (asset) as of June 30. Which of the following journal entries would be appropriate to account for this forward exchange contract as of June 30, 202X Dr. Derivative Financial Instrument Cr. Other Comprehensive Income Dr. Derivative Financial Instrument. Cr. Deferred Acquistion Cost $20,000 $20,000 $20,000 $20,000 Dr. Derivative Financial Instrument. Cr. Unrealized gain on derivative $20,000 $20,000 Dr. Derivative Financial Instrument. $20,000 Cr. Unrealized gain on derivative $20,000 Dr. Unrealized loss on firm commitment $20,000 Cr. Firm Commitment $20,000

QUESTION 3 Assume that on January 1, 202X, Company A entered into a definitive agreement to acquire Target Company in an all-cash transaction with cash payments to be made to the selling shareholders of the Target Company in a foreign currency when the transaction closes. Company A believes that the acquisition of Target Company is probable of occurring and expects to close the transaction and make the payments to the selling shareholders on September 30, 202X. In order to hedge the foreign currency exchange rate risk associated with this transaction, Company A, on January 1, 202X, also entered into a forward contract to acquire the foreign currency and sell its functional currency with a settiment date corresponding to the date that the company expects to close the acquisition. Assume that the notional amount of this forward contact is equal to the aggregate amount of the foreign currency that the company expects to pay when it closes the acquisition. Assume further that the fair value of the forward exchange contract was zero when it was entered into and is $20,000 (asset) as of June 30. Which of the following journal entries would be appropriate to account for this forward exchange contract as of June 30, 202X Dr. Derivative Financial Instrument Cr. Other Comprehensive Income Dr. Derivative Financial Instrument. Cr. Deferred Acquistion Cost $20,000 $20,000 $20,000 $20,000 Dr. Derivative Financial Instrument. Cr. Unrealized gain on derivative $20,000 $20,000 Dr. Derivative Financial Instrument. $20,000 Cr. Unrealized gain on derivative $20,000 Dr. Unrealized loss on firm commitment $20,000 Cr. Firm Commitment $20,000

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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QUESTION 3 Assume that on January 1, 202X, Company A entered into a definitive agreement to acquire Target Company in an all-cash transaction with cash payments to be made to the selling shareholders of the Target Company in a foreign currency when the transaction closes. Company A believes that the acquisition of Target Company is probable of occurring and expects to close the transaction and make the payments to the selling shareholders on September 30, 202X. In order to hedge the foreign currency exchange rate risk associated with this transaction, Company A, on January 1, 202X, also entered into a forward contract to acquire the foreign currency and sell its functional currency with a settlment date corresponding to the date that the company expects to close the acquisition. Assume that the notional amount of this forward contact is equal to the aggregate amount of the foreign currency that the company expects to pay when it closes the acquisition. Assume further that the fair value of the forward exchange contract was zero when it was entered into and is $20,000 (asset) as of June 30. Which of the following journal entries would be appropriate to account for this forward exchange contract as of June 30, 202X Dr. Derivative Financial Instrument Cr. Other Comprehensive Income Dr. Derivative Financial Instrument. Cr. Deferred Acquistion Cost $20,000 $20,000 $20,000 $20,000 ○ Dr. Derivative Financial Instrument. Cr. Unrealized gain on derivative $20,000 $20,000 Dr. Derivative Financial Instrument. $20,000 Cr. Unrealized gain on derivative $20,000 Dr. Unrealized loss on firm commitment $20,000 Cr. Firm Commitment $20,000
Transcribed Image Text:QUESTION 3 Assume that on January 1, 202X, Company A entered into a definitive agreement to acquire Target Company in an all-cash transaction with cash payments to be made to the selling shareholders of the Target Company in a foreign currency when the transaction closes. Company A believes that the acquisition of Target Company is probable of occurring and expects to close the transaction and make the payments to the selling shareholders on September 30, 202X. In order to hedge the foreign currency exchange rate risk associated with this transaction, Company A, on January 1, 202X, also entered into a forward contract to acquire the foreign currency and sell its functional currency with a settlment date corresponding to the date that the company expects to close the acquisition. Assume that the notional amount of this forward contact is equal to the aggregate amount of the foreign currency that the company expects to pay when it closes the acquisition. Assume further that the fair value of the forward exchange contract was zero when it was entered into and is $20,000 (asset) as of June 30. Which of the following journal entries would be appropriate to account for this forward exchange contract as of June 30, 202X Dr. Derivative Financial Instrument Cr. Other Comprehensive Income Dr. Derivative Financial Instrument. Cr. Deferred Acquistion Cost $20,000 $20,000 $20,000 $20,000 ○ Dr. Derivative Financial Instrument. Cr. Unrealized gain on derivative $20,000 $20,000 Dr. Derivative Financial Instrument. $20,000 Cr. Unrealized gain on derivative $20,000 Dr. Unrealized loss on firm commitment $20,000 Cr. Firm Commitment $20,000
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