Part I
Introduction:
Forward Exchange Contract: A forward exchange contract shows exchange rates for selected major international currencies for one month, three months, and six months forward contracts. An active dealer market is available for companies willing to transact in foreign currencies. The forward rate on a date is not the same as the spot rate. The difference between spot and the forward rate is known as the spread. The spread gives information about the strength or weakness of currencies.
The entries to record the purchase of equipment, assuming forward contract is not designed as a hedge, but is entered into manage the company’s foreign currency exposure and also determine effect of these transactions on financial statements.
Part I

Answer to Problem 11.10E
Net effect on income $700
Explanation of Solution
a. entries
Date | Particular | Debit $ | Credit $ |
12/16/20X7 | Equipment | 95,200 | |
Accounts payable | 95,200 | ||
(Purchase of equipment payable in Swiss franc) | |||
Foreign currency receivable from broker | 93,800 | ||
Dollars payable to exchange broker | 93,800 | ||
(Signed a forward exchange contract for 60 days) | |||
12/31/X7 | Foreign currency transaction loss | 2,800 | |
Accounts payable | 2,800 | ||
(Exchange transaction loss recognized on revaluation of payable) | |||
Foreign currency receivable form broker | 3,500 | ||
Foreign currency transaction gain | 3,500 | ||
(Foreign currency gain on revaluation recognized on December 31) | |||
02/14/20X8 | Foreign currency transaction loss | 700 | |
Foreign currency receivable from broker | 700 | ||
(Loss on revaluation of February recognized) | |||
Accounts payable | 1,400 | ||
Foreign currency transaction gain | 1,400 | ||
(Revaluation of foreign currency accounts payable) | |||
Dollars payable to exchange broker | 93,800 | ||
Cash | 93,800 | ||
(Paid U.S dollars to exchange broker for forward contract) | |||
Foreign currency units | 96,600 | ||
Foreign currency receivable from exchange broker | 96,600 | ||
(Received francs from exchange broke recognized in U.S. dollar) | |||
Accounts payable | 96,600 | ||
Foreign currency units | 96,600 | ||
(Settlement of foreign currency payable) |
- Exchange of equipment value at purchase
- Foreign currency receivable from broker
- Revaluation of accounts payable to current U.S. dollars:
- Revaluation of foreign currency receivable:
- Revaluation of foreign currency receivable to current equivalent U.S. dollar:
- Revaluation of foreign currency accounts payable to current U.S. dollars:
- Receipt of Francs from exchange broker
$98,000 | |
($95,200) | |
$2,800 |
$97,300 | |
($93,800) | |
$3,500 |
$96,600 | |
($97,300) | |
$700 |
$96,600 | |
($98,000) | |
$1,400 |
b. Effect on income statement
$ | |
Foreign currency exchange loss (with Swiss co) | (2,800) |
Foreign currency exchange gain ( with broker) | 3,500 |
Net effect on income | 700 |
c. Overall effect of transaction
$ | |
Foreign exchange gain 20X7 | 700 |
Foreign exchange loss on receivable 20X8 | (700) |
Foreign exchange transaction gain on payable 20X8 | 1,400 |
Overall effect | 1,400 |
Part II
Introduction:
Forward Exchange Contract: A forward exchange contract shows exchange rates for selected major international currencies for one month, three months, and six months forward contracts. An active dealer market is available for companies willing to transact in foreign currencies. The forward rate on a date is not the same as the spot rate. The difference between spot and the forward rate is known as the spread. The spread gives information about the strength or weakness of currencies.
The entries assuming the forward contract is designed as a cash flow hedge for variability of future
Part II

Explanation of Solution
Date | Particular | Debit $ | Credit $ |
12/16/20X7 | Equipment | 95,200 | |
Accounts payable | 95,200 | ||
(Purchase of equipment payable in Swiss franc) | |||
Foreign currency receivable from broker | 93,800 | ||
Dollars payable to exchange broker | 93,800 | ||
(Signed a forward exchange contract for 60 days) | |||
12/31/X7 | Foreign currency transaction loss | 2,800 | |
Accounts payable | 2,800 | ||
(Exchange transaction loss recognized on revaluation of payable) | |||
Foreign currency receivable form broker | 3,500 | ||
Other comprehensive income | 3,500 | ||
(Foreign currency gain on revaluation recognized on December 31) | |||
Other comprehensive income | 2,800 | ||
Foreign currency transaction gain | 2,800 | ||
(Offset of foreign currency transaction loss on revaluation) | |||
02/14/20X8 | Other comprehensive income | 700 | |
Foreign currency receivable from broker | 700 | ||
(Loss on revaluation of February recognized) | |||
Accounts payable | 1,400 | ||
Foreign currency transaction gain | 1,400 | ||
(Revaluation of foreign currency accounts payable) | |||
Foreign currency transaction loss | 1,400 | ||
Other comprehensive income | 1,400 | ||
(Offset of foreign currency transaction gain) | |||
Dollars payable to exchange broker | 93,800 | ||
Cash | 93,800 | ||
(Paid U.S dollars to exchange broker for forward contract) | |||
Foreign currency units | 96,600 | ||
Foreign currency receivable from Exchange broker | 96,600 | ||
(Received francs from exchange broke recognized in U.S. dollar) | |||
Accounts payable | 96,600 | ||
Foreign currency units | 96,600 | ||
(Settlement of foreign currency payable) |
- Exchange of equipment value at purchase
- Foreign currency receivable from broker
- Revaluation of accounts payable to current U.S. dollars:
- Revaluation of foreign currency receivable:
- Revaluation of foreign currency receivable to current equivalent U.S. dollar:
- Revaluation of foreign currency accounts payable to current U.S. dollars:
- Receipt of Francs from exchange broker
$98,000 | |
($95,200) | |
$2,800 |
$97,300 | |
($93,800) | |
$3,500 |
$96,600 | |
($97,300) | |
$700 |
$96,600 | |
($98,000) | |
$1,400 |
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