1.
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.
1.
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
| Date | Accounts & Explanations | Debit $ | Credit $ |
| 1-Mar | 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.
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.
2.
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.
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.
3.
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.
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.
4.
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
Want to see more full solutions like this?
- Dorset Manufacturing produces a single product that sells for $125 per unit. Variable costs are $72 per unit, and fixed costs total $186,000 per month. Calculate the operating income if the selling price is raised to $132 per unit, marketing expenditures are increased by $24,000 per month, and monthly unit sales volume becomes 4,800 units.arrow_forwardHelparrow_forwardColin Industries has fixed costs of $654,800. The selling price per unit is $175, and the variable cost per unit is $95. How many units must the company sell in order to earn a profit of $245,000?arrow_forward
- Please help me solve this general accounting problem with the correct financial process.arrow_forwardCalculate accounts receivable turnover: Net Credit Sales $500,000, Average Accounts Receivable $100,000.arrow_forwardInventory turnover ratio: Cost of Goods Sold $300,000, Average Inventory $60,000.arrow_forward
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT