Chapter 10, Problem 10.3P

1.

To determine

Concept Introduction:

Forward Contract: Forward contract is the contract entered by two private parties to buy/sell a given commodity, foreign currency at a specified rate.

Fair Value Hedge: Fair value hedge accounting is accounting for hedges based on changes in fair value of assets or liabilities.

The income statement effect of the foreign currency transaction.

Answer to Problem 10.3P

Effect of foreign currency transaction
	March $	April $
Gross Profit on sales for the transaction	76,000
Loss on foreign currency	200	800

Explanation of Solution

The impact on Income statement can be understood by following journal entries

Date	Accounts & Explanations	Debit $	Credit $
1-Mar	Accounts Receivable-FC	236000
	Sales		236000
	(Sale of goods at 200,000 euros @$1.180)
1-Mar	Cost of goods sold	160,000
	Inventory		160,000
	(Cost of goods sold accounted)
31-Mar	Loss on foreign currency	200
	Accounts Receivable-FC		200
	(Decrease in spot rate accounted (1.179-1.180)*200,000
30-Apr	Cash ($1.175*200,000 euros)	235000
	Loss on foreign currency (1.179-1.75)*200,000	800
	Accounts Receivable-FC		235800
	(Settlement of 200,000 euros @ $1.175

Thus, the income statement effect of the foreign currency transaction have been determined.

2.

To determine

Concept Introduction:

Forward Contract: Forward contract is the contract entered by two private parties to buy/sell a given commodity, foreign currency at a specified rate.

Fair Value Hedge: Fair value hedge accounting is accounting for hedges based on changes in fair value of assets or liabilities.

The income statement effect of the hedge on the foreign currency transaction.

Answer to Problem 10.3P

Effect of hedge on foreign currency transaction
	March $	April $
Gain on forward contract	597	603

Explanation of Solution

Computation of effect of hedging	1-Mar	31-Mar	30-Apr
Number of days remaining	60 days	30-days	Settlement
Number of FC	200000	200000	200000
Forward rate	1.181	1.178	1.175
Initial forward rate		1.181	1.181
Profit		600	1200
PV of the profit
n=1, i=6%/12		597
Less profit of the earlier period booked			597
Profit recorded			603

Journal entries to record the transaction are as follows:

Date	Accounts & Explanations	Debit $	Credit $
1-Mar	Memo entry:entered into forward contract for 200,000 euros @$1.180
31-Mar	Forward Contract	597
	Gain on Forward contract		597
	(Gain on forward contract recorded)
30-Apr	Cash	1200
	Forward Contract		597
	Gain on forward contract		603
	(Forward contract settled)

Thus, the income statement effect of the hedge on foreign currency transaction have been determined.

3.

To determine

Concept Introduction:

Forward Contract: Forward contract is the contract entered by two private parties to buy/sell a given commodity, foreign currency at a specified rate.

Fair Value Hedge: Fair value hedge accounting is accounting for hedges based on changes in fair value of assets or liabilities.

The income statement effect of the foreign currency commitment.

Answer to Problem 10.3P

Effect of foreign currency commitment
	March $	April $
Loss on FC commitment	300	1200

Explanation of Solution

Journal entries for the given transaction are as follows

Date	Accounts & Explanations	Debit $	Credit $
15-Mar	Memo entry: entered into FC commitment for 300,000 euros @$1.181
31-Mar	Loss on FC commitment(1.179-1.180)*300,000	300
	FC commitment		300
	(Loss in FC value booked)
30-Apr	Loss on FC commitment(1.175-1.179)*300,000	1200
	FC commitment		1200
	(Loss in FC value booked)

Thus, the income statement effect of the foreign currency commitment have been determined.

4.

To determine

Concept Introduction:

Forward Contract: Forward contract is the contract entered by two private parties to buy/sell a given commodity, foreign currency at a specified rate.

Fair Value Hedge: Fair value hedge accounting is accounting for hedges based on changes in fair value of assets or liabilities.

The income statement effect of the hedge on the foreign currency commitment.

Answer to Problem 10.3P

Effect of hedge on foreign currency transaction
	March $	April $
Gain on forward contract	599	894

Explanation of Solution

Computation of effect of hedging	15-Mar	31-Mar	30-Apr
Number of days remaining	90 days	75 days	45 days
Number of FC	300000	300000	300000
Forward rate	1.179	1.177	1.174
Initial forward rate		1.179	1.179
Profit		600	1500
PV of the profit
n=1, i=6%/24		599
n=2, i=6%/24			1493
Less profit of the earlier period booked			599
Profit recorded			894

Journal entries are as follows

Date	Accounts & Explanations	Debit $	Credit $
15-Mar	Memo entry: entered into forward contract for 300,000 euros @$1.179
31-Mar	Forward Contract	599
	Gain on Forward contract		599
	(Gain on forward contract recorded)
30-Apr	Forward Contract	894
	Gain on Forward contract		894
	(Gain on forward contract recorded)

Thus, the income statement effect of the hedge on foreign currency commitment have been determined