Chapter 11, Problem 11.23.2P

a

To determine

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 the spot and the forward rate is known as the spread. The spread gives information about the strength or weakness of currencies.

The entries recorded by M’s foreign currency activities during 20X5 and 20X6.

Explanation of Solution

Date	Particular	Debit $	Credit $
03/01/X5	Dollars receivable from broker	19,200
	Foreign currency payable to exchange broker		19,200
	(Signed a forward exchange contract for 90 days)
5/30/X5	Foreign currency transaction loss	1,200
	Foreign currency payable to exchange broker		1,200
	(Exchange transaction loss recognized on revaluation of payable)
	Foreign currency payable to exchange broker	20,400
	Foreign currency units		20,400
	(Foreign currency payable recognized)
	Cash	19,200
	Dollars receivable from exchange broker		19,200
	(Cash received from exchange broker)

1. Foreign currency receivable from broker

$\mathrm{\$}19,200=\mathrm{C}\mathrm{\$}0,000\times \mathrm{\$}.64$

2. Revaluation of accounts payable to current U.S. dollars

$\mathrm{C}\mathrm{\$}30,000\times \mathrm{\$}.68\mathrm{M}\mathrm{a}\mathrm{y}30\mathrm{s}\mathrm{p}\mathrm{o}\mathrm{t}\mathrm{r}\mathrm{a}\mathrm{t}\mathrm{e}$	$20,400
$\mathrm{C}\mathrm{\$}30,000\times \mathrm{\$}.64\mathrm{M}\mathrm{a}\mathrm{r}\mathrm{c}\mathrm{h}1\mathrm{f}\mathrm{o}\mathrm{r}\mathrm{w}\mathrm{a}\mathrm{r}\mathrm{d}\mathrm{r}\mathrm{a}\mathrm{t}\mathrm{e}$	($19,200)
Foreign currency transaction loss	$1,200

3. Foreign currency payable to exchange broker recognized

$\mathrm{\$}20,400=\text{C\$30,000}\text{×}\text{\$}\text{.68}\text{May}\text{30}\text{spot}\text{rate}$

4. Dollars received from exchange broker $19,200

b

To determine

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 the spot and the forward rate is known as the spread. The spread gives information about the strength or weakness of currencies.

The amount of foreign currency transaction gain or loss M would report on its income statement in 20X5 in Part I and II are combined

Answer to Problem 11.23.2P

Net loss in 20X5 $1,100

Explanation of Solution

Computation of foreign exchange transaction loss 20X5

	Gain $	Loss $
Transaction 1: May 30 Part I	900
May 30 Part II		1,200
Transaction 2: August 30 Part II	250	250
October 29 Part I		1,000
October 29 Part II	250
Transaction 3: December 31 Part I	200
December 31, Part II		250
Net loss	$1,100

Transaction 1.

Part I

Spot rate on March 1 C$1 = $0.65 and spot rate on May 30 C$1 = $0.68

  $\text{Gain}\text{on}\text{May}\text{30:}\text{}\text{\$900}\text{=}\text{C}\mathrm{\$}30,000=\text{}(\mathrm{\$}0.68\text{}-\mathrm{\$}0.65)$

Part II

Spot rate on March 1 C$1 = $0.64 and spot rate on May 30 C$1 = $0.68

  $\text{Gain}\text{on}\text{May}\text{30:}\text{}\text{\$1,200}\text{=}\text{C}\mathrm{\$}30,000=\text{}(\mathrm{\$}0.68\text{}-\mathrm{\$}0.64)$

Transaction 2.

Part I

Spot rate on July 1 ¥1 = $0.104 and spot rate on October 29 ¥1 = $0.106

  $\text{Gain}\text{on}\text{October}\text{}29\text{:}\text{}\text{\$1,000}\text{=}\yen 500,000=\text{}(\mathrm{\$}0.106\text{}-\mathrm{\$}0.104)$

Part II

Spot rate on July 1 ¥1 = $0.104 and spot rate on August 30 ¥1 = $0.1055

  $\text{Gain}\text{on}\text{August}\text{30}\text{:}\text{}\text{\$250}\text{=}\yen 500,000=\text{}(\mathrm{\$}0.1055-\mathrm{\$}0.105)$

Forward rate on July 1 ¥1 = $0.105 and spot rate on August 30 ¥1 = $0.1055

  $\text{Gain}\text{on}\text{August}\text{30}\text{:}\text{}\text{\$250}\text{=}\yen 500,000=\text{}(\mathrm{\$}0.1055-\mathrm{\$}0.105)$

Transaction 3:

Part I

Spot rate on November 16 £1 = $1.65 and spot rate on December 30 £1 = $1.63

  $\text{Gain}\text{on}\text{December}\text{30}\text{:}\text{}\text{\$200}\text{=}\pounds 10,000=\text{}(\mathrm{\$}1.65-\mathrm{\$}1.63)$

Part II

Forward rate on November 16 £1 = $1.67 and spot rate on December 30 £1 = $1.645

  $\text{Gain}\text{on}\text{December}\text{30}\text{:}\text{}\text{\$250}\text{=}\pounds 10,000=\text{}(\mathrm{\$}1.67-\mathrm{\$}1.645)$

c

To determine

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 the spot and the forward rate is known as the spread. The spread gives information about the strength or weakness of currencies.

The amount of foreign currency transaction gain or loss M would report on its income statement in 20X6 in Part I and II are combined

Answer to Problem 11.23.2P

Net Loss in 20X6 $150

Explanation of Solution

Computation of foreign exchange transaction loss 20X6

	Gain $	Loss $
Transaction 3
Part I January 15, 20X6	-	100
Part II January 15,20X6	-	50
Net loss		150

Transaction 3:

Part I

Spot rate on November 16 £1 = $1.63 and spot rate on January 15 £1 = $1.64

  $\text{Gain}\text{on}\text{January}\text{15}\text{:}\text{}\text{\$100}\text{=}\pounds 10,000=\text{}(\mathrm{\$}1.64-\mathrm{\$}1.63)$

Part II

Forward rate on December 31 £1 = $1.645 and spot rate on January 15 £1 = $1.640

  $\text{Gain}\text{on}\text{December}\text{30}\text{:}\text{}\text{\$50}\text{=}\pounds 10,000=\text{}(\mathrm{\$}1.645-\mathrm{\$}1.640)$