Advanced Accounting
12th Edition
ISBN: 9781305084858
Author: Paul M. Fischer, William J. Tayler, Rita H. Cheng
Publisher: Cengage Learning
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Question
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.
1.
Expert Solution
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.
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.
2.
Expert Solution
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.
3.
Expert Solution
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.
4.
Expert Solution
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
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