When a company uses put options to hedge foreign currency firm commitments, the accounting is relatively simple. The company records the cost of the option as an expense on its income statement. Then, when the contract expires, any difference between the strike price and the actual market price is recorded as a gain or loss on the income statement." Can you please illustrate the statement with an example of when the contract falls between two fiscal years?

When a company uses put options to hedge foreign currency firm commitments, the accounting is relatively simple. The company records the cost of the option as an expense on its income statement. Then, when the contract expires, any difference between the strike price and the actual market price is recorded as a gain or loss on the income statement." Can you please illustrate the statement with an example of when the contract falls between two fiscal years?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Similar questions

On November 1, 2020, Ocean Grove, Inc., a U.S. company, purchased from Monterrey Corporation, a Mexican company, some machinery that cost 1,000,000 pesos (the machinery was delivered on November 1, so this is the "existing payable" scenario). The invoice was payable in pesos on February 1, 2021. To hedge against any potential changes in the exchange rate, Ocean Grove entered into a forward contract on November 1, 2020 with Bradley Beach Trader. a US brokerage and investment firm. The contract specified that Ocean Grove would buy 1,000,000 pesos from Bradley Beach for settlement on February 1, 2021. Assume the company uses the gross method. Relevant exchange rates are below: 11/1/20 12/31/20 2/1/21 Spot $0.042 $0.043 $0.040 rate Forward rate for 2/1/21 $0.045 $0.047 When Ocean Grove records the forward contract with Brady Beach Trader on November 1, which side will be denominated in pesOs, and for how much? Contract Payable for $42,000 Contract Receivable for $42,000 Contract Receivable…
Identify what transaction risk management is done in the following cases: (A) ABC Corporation will only accept P200,000 or its equivalent on the payment date despite having a USD4,000 sale. (B) ABC Corporation pays a foreign-currency denominated purchase early when it sees that the Philippine peso will decrease in value.a. Invoicing in home currency; Leadingb. Forward contract; Leadingc. Invoicing in home currency; Laggingd. Forward contract; Lagging
N4. Account
10) A company is due to receive a certain amount of a foreign currency in three months. What type of option contract is appropriate for hedging? Select one: A short position in a three-month put option on the foreign currency A long position in a three-month call option on the foreign currency A long position in a three-month put option on the domestic currency A long position in a three-month put option on the foreign currency
An Omani firm has to make payment of 3 million INR to Indian Company after 30 days. Since the company exposing the risk of currency fluctuation so purchased the forward contract at OMR0.006279 = 1 INR. the spot rate after 30 days was OMR 0.006542/INR Which of the following will be the profit or loss to the firm, if they execute the forward contract? a. Loss of OMR 789 b. All the options are wrong c. Profit of OMR789 d. Profit of OMR 526 e. Loss of OMR 526
a company signs a contract with another party to transaction at a specific rate for 180 days into the future. the exchange rate used is the
On June 1, Maxwell Corporation (a U.S.-based company) sold goods to a foreign customer at a price of 1,300,000 pesos and will receive payment in three months on September 1. On June 1, Maxwell acquired an option to sell 1,300,000 pesos in three months at a strike price of $0.094. The time value of the option is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income over the life of the option. Relevant exchange rates and option premia for the peso are as follows: Put Option Premium for September 1 (strike price $0.094) $ 0.0057 0.0038 N/A Date Spot Rate $ 0.094 0.093 0.092 June 1 June 30 September 1 Maxwell must close its books and prepare its second-quarter financial statements on June 30. Assuming that Maxwell designates the foreign currency option as a cash flow hedge of a foreign currency receivable, prepare journal entries for the export sale and related hedge in U.S. dollars. What is the impact on net income over the two…
In each of the following cases, indicate whether it would be appropriate for an FI to buy or sell a forward contract to hedge the appropriate risk. • A commercial bank plans to issue CDs in three months. • An insurance company plans to buy bonds in two months. • A thrift is going to sell Treasury securities it holds in its investment portfolio next month. • A U.S. bank lends to a French company: the loan is payable in euros. • A finance company has assets with a duration of six years and liabilities with a duration of 13 years.
2. Monty Corporation had the following activities in 2020. 1. Sale of land $194,000 4. Purchase of equipment $386,000 2. Purchase of inventory $913,000 5. Issuance of common stock $326,000 3. Purchase of treasury stock $74,000 6. Purchase of available-for-sale debt securities $54,000 Compute the amount Monty should report as net cash provided (used) by investing activities in its 2020 statement of cash flows. (Show amounts that decrease cash flow with either a - sign e.g. -15,000 or in parenthesis e.g. (15,000).) Net cash select an option by investing activities $enter a dollar amount
Under what conditions can companies use hedge accounting to account for a foreign currency option used to hedge a forecasted foreign currency transaction?
Assume that the beer arrived on August 15, and the company made payment on October 15. On August 15, the company entered into a two-month forward contract to purchase 276,000 euros. The company designated the forward contract as a cash flow hedge of a foreign currency payable. Forward points are excluded in assessing hedge effectiveness and amortized to net income using a straight-line method on a monthly basis. Prepare journal entries to account for the import purchase and foreign currency forward contract. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations.) Record the foreign exchange loss for the third quarter.
On March 1, Derby Corporation (a U.S.-based company) expects to order merchandise from a supplier in Norway in three months. On March 1, when the spot rate is $0.28 per Norwegian krone, Derby enters into a forward contract to purchase 617,500 Norwegian kroner at a three-month forward rate of $0.29. Forward points are excluded in assessing the forward contract's effectiveness as a hedge, and are amortized to net income on a straight-line basis. At the end of three months, when the spot rate is $0.286 per Norwegian krone, Derby orders and receives the merchandise, paying 617,500 kroner. The merchandise is sold within 30 days. Required: a-1. Prepare all journal entries for Derby Corporation related to this transaction and hedge. a-2. What amount should Derby Corporation report in the current year's net income as cost of goods sold? b. What amount should Derby Corporation report in the current year's net income as foreign exchange gain or loss? Complete this question by entering your…