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a.
Prepare
a.
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Explanation of Solution
The journal entries to account for import purchase without hedge:
Date | Account Title and explanation | Post Ref. | Debit($) | Credit($) |
10/1/17 | Purchase | 2,00,000 | ||
Account Payable | 2,00,000 | |||
( To record purchase and account payable at spot rate) | ||||
12/31/17 | Foreign exchange loss | 10,000 | ||
Account Payable | 10,000 | |||
(To adjust the account payable at spot rate on September 30 and record foreign exchange loss) | ||||
12/31/17 | Foreign exchange loss | 10,000 | ||
Account Payable | 10,000 | |||
(To adjust the value of account payable and loss due to change in foreign exchange loss) | ||||
1/31/18 | Account Payable | 2,20,000 | ||
Cash | 2,20,000 | |||
(To record the payment of 2,20,000 Euros) |
Table: (1)
b.
Prepare journal entries to account for import purchase and foreign currency forward
b.
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Explanation of Solution
The journal entries to account for import purchase and foreign currency forward cash flow as fair value hedge:
Date | Account Title and explanation | Post Ref. | Debit($) | Credit($) |
Sept-15 | Purchase | 2,00,000 | ||
Account Payable | 2,00,000 | |||
( To record purchase of part on spot rate) | ||||
Sept-30 | Foreign exchange loss | 10,000 | ||
Account Payable | 10,000 | |||
(To revalue the foreign currency account payable and recognize the loss on and foreign exchange) | ||||
Forward contract | 5,940.6 | |||
Gain on forward contract | 5,940.6 | |||
(To record the forward contract as an assets by taking interest rate of 12% ( 1% per month) is 0.9901) | ||||
Oct-31 | Foreign exchange loss | 10,000 | ||
Account Payable | 10,000 | |||
(To revalue at spot rate as on 10/31) | ||||
Forward contract | 2059.4 | |||
Gain on forward contract | 2059.4 | |||
(To adjust the carrying value as forward contract at fair value) | ||||
Account Payable | 2,20,000 | |||
Foreign currency | 2,20,000 | |||
( To record the payment to supplied for purchase) | ||||
Foreign currency | 2,20,000 | |||
Cash | 2,12,000 | |||
Forward contract | 8,000 | |||
( To record the settlement of forward contract) |
Table: (2)
c.
Prepare journal entries to account for foreign currency, forward contract firm commitment and import purchase.
c.
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Explanation of Solution
The journal entries to account for foreign currency, forward contract firm commitment and import purchase:
Date | Account Title and explanation | Post Ref. | Debit($) | Credit($) |
Sept-15 | ||||
(There is no entry to record either the Purchase agreement or the forward contract because both are executor contract. A memorandum designates the forward contract a hedge of the risk of changes in the fair value of the firm commitment resulting from changes in US Dollar-rubles forward exchange rate) | ||||
Sept-30 | Forward contract | 2,970.3 | ||
Gain on forward contract | 2,970.3 | |||
(To record the forward contract as an assets at its fair value and record a forward contract loss for the change in the fair value) | ||||
Loss on firm commitment | 2,970.3 | |||
Firm commitment | 2,970.3 | |||
(To record the forward commitment as liability at its fair value and record a firm commitment loss for the change in the fair value as the firm commitment since September, 30) | ||||
Oct-31 | Foreign exchange loss | 10,000 | ||
Account Payable | 10,000 | |||
(To revalue at spot rate as on 10/31) | ||||
Forward contract | 2,970.3 | |||
Gain on forward contract | 2,970.3 | |||
(To adjust the fair value and record a forward contract gain for the change in the fair value from 2970.3) | ||||
Loss on firm commitment | 22,970.3 | |||
Firm commitment | 22,970.3 | |||
( To adjust fair value of firm commitment) | ||||
Purchase | ||||
Foreign currency | ||||
( To record purchase and the payment as an liability at spot rate on October 31st ) | ||||
Foreign currency | 2,20,000 | |||
Cash | 2,12,000 | |||
Forward contract | 8,000 | |||
(To record settlement as forward contract and remove the forward contract from the accounts) | ||||
Firm commitment | 25,940.6 | |||
Adjustment to net income | 25,940.6 | |||
( To adjust the firm commitment as an adjust to net income) |
Table: (3)
d.
Prepare journal entries to account for import purchase and foreign currency option for cash flow.
d.
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Explanation of Solution
The journal entries to account for import purchase and foreign currency option for cash flow:
Date | Account Title and explanation | Post Ref. | Debit($) | Credit($) |
Sept-15 | Goods Purchase | 2,00,000 | ||
Account Payable ( Euros) | 2,00,000 | |||
( To record the purchase at spot) | ||||
Sept-30 | Foreign currency option | 7,000 | ||
Cash | 7,000 | |||
(To record the purchase as the foreign currency option at fair value of $0.035) | ||||
Oct-31 | Foreign exchange loss | 10,000 | ||
Account Payable | 10,000 | |||
(To adjust the value of Euros at spot rate and record the loss resulting from appreciation in Euros since 15th September) | ||||
Foreign currency option | 2,970.3 | |||
AOCI ( Accumulated other comprehensive income) | 2,970.3 | |||
(To adjust the fair value option from $0.035 to $ 0.070 with corresponding credit to AOCI ( Accumulated other comprehensive income)) | ||||
Account Payable | 10,000 | |||
Foreign exchange gain | 10,000 | |||
( To adjust the value of Euros payable to new spot rate of $1.10) | ||||
AOCI ( Accumulated other comprehensive income) | 10,000 | |||
Foreign currency option | 10,000 | |||
( To adjust the fair value of the option from $1.00 to $1.10 with corresponding credit to AOCI ( Accumulated other comprehensive income) | ||||
Loss on foreign currency option | 10,000 | |||
AOCI ( Accumulated other comprehensive income) | 10,000 | |||
( To record loss on foreign currency option to affect the foreign currency loss on account payable with corresponding credit to AOCI ( Accumulated other comprehensive income) | ||||
Account Payable | 2,20,000 | |||
Foreign Currency | 2,20,000 | |||
( To record payment of Euros 2,20,000 to supplied foreign Currency) | ||||
Foreign Currency | 2,20,000 | |||
Cash | 2,00,000 | |||
Forward contract | 20,000 | |||
(To foreign Currency option to record exercise of option and remove Foreign Currency option from accounts) |
Table: (4)
e.
Prepare journal entries to account for foreign currency option, firm commitment and import purchase.
e.
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Explanation of Solution
The journal entries to account for foreign currency option, firm commitment and import purchase:
Date | Account Title and explanation | Post Ref. | Debit($) | Credit($) |
Sept-15 | Foreign currency option | 7,000 | ||
Cash | 7,000 | |||
( To record the purchase at foreign currency option) | ||||
Sept-30 | Loss on foreign currency option | 7,000 | ||
Cash | 7,000 | |||
(To adjust the fair value of option as a loss) | ||||
Loss on firm commitment | 9,901 | |||
Firm commitment | 9,901 | |||
( To record the firm commitment as a liability at its fair value) | ||||
Oct-31 | Loss on foreign currency option | 6,000 | ||
Foreign currency option | 6,000 | |||
(To adjust the fair value foreign currency option and record loss on Foreign currency option for change in fair value) | ||||
Firm commitment | 29,901 | |||
Gain on firm commitment | 29,901 | |||
(To adjust the fair value of firm commitment and record firm commitment gain for change in fair value) | ||||
Purchase | 2,20,000 | |||
Foreign Currency | 2,20,000 | |||
( To Record the purchase and payment at spot rate for 2,20,000 Euros as liability at spot rate as $1.1) | ||||
Foreign Currency | 2,20,000 | |||
Cash | 2,00,000 | |||
Forward contract | 20,000 | |||
(To foreign Currency option to record exercise of option and remove Foreign Currency option from accounts) | ||||
Firm commitment | 20,000 | |||
Adjustment to net income firm commitment | 20,000 | |||
( To lose the firm commitment as an adjustment to net income |
Table: (5)
Working note:
Date | Option premium for | Foreign Currency option | Spot rate | Firm Commitment | ||
Fair Value | Change in fair value | - | Fair Value | Change in fair value | ||
9/30/2017 | $0.04 | 7,000 | - | 1 | - | 0 |
10/31/2017 | $0.07 | 14,000 | 7,000 | 1.05 | 9,901 | 9,901 |
10/31/2107 | 0.1 | 20,000 | 6,000 | 1.1 | 20,000 | 24,901 |
Table: (6)
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Loose Leaf for Fundamentals of Advanced Accounting
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