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Concept explainers
a.
Prepare
a.
![Check Mark](/static/check-mark.png)
Explanation of Solution
The journal entries read to be passed in year (June month) (Cash flow hedge):
Date | Particulars | Post Ref. | Debit | Credit |
01-06-2015 | goods purchase | $ 85,000 | ||
Accounts payable | $ 85,000 | |||
(to record Purchase of goods and 1,000,000 Francs at the spot rate of $0.085) | ||||
01-06-2015 | Foreign Currency Option | $ 2,000 | ||
Cash | $ 2,000 | |||
(To record the purchase of foreign currency option at the fair value of $0.002) | ||||
30-06-2015 | Foreign exchange loss | $ 3,000 | ||
Account Payable | $ 3,000 | |||
(To adjust the value of the Francs at Spot rate of $0.088) | ||||
09-11-2015 | Foreign Currency Option | $ 2,000 | ||
AOCI | $ 2,000 | |||
(To adjust the fair value of the option from $0.002 to $0.004 with corresponding credit to AOCI (Accumulated Other Comprehensive Income) | ||||
AOCI | $ 11,000 | |||
Gain on Foreign Currency | $ 3,000 | |||
Option Income | $ 5,000 | |||
(To record gain of foreign currency option and the time value change of the option) |
Table: (1)
Impact on the net income for quarter ending on 30th June:
Particulars | Amount | Amount |
Purchase | $ 85,000 | |
Foreign Exchange Loss | ($ 3,000) | |
Gain on Foreign currency option | $ 3,000 | |
Net gain | $ 0 | |
Option Income | $ 5,000 | |
Impact on Net Income | $ 90,000 |
Table: (2)
Journal Entries as on 1st September:
Date | Particulars | Post Ref. | Debit | Credit |
09-01-2015 | Account Payable | $ 2,000 | ||
Foreign Exchange Gain | $ 2,000 | |||
(To adjust the value of the Francs payable to new spot rate of $0.090) | ||||
AOCI | $ 5,000 | |||
Foreign exchange option | $ 5,000 | |||
(To adjust the fair value of the option from $0.085 to $0.090 with corresponding credit to AOCI) | ||||
30-06-2015 | Loss on foreign currency option | $ 2,000 | ||
AOCI | $ 2,000 | |||
(To record gain on foreign currency option to affect the foreign currency loss and account payable with corresponding credit to AOCI) | ||||
09-01-2015 | Account Payable | $ 90,000 | ||
Foreign Currency | $ 90,000 | |||
(To record payment of Francs 1,000,000 supplied at spot rate) | ||||
Foreign Currency | $ 90,000 | |||
Cash | $ 85,000 | |||
Foreign Currency option | $ 5,000 | |||
(To record exercise of option @$0.085 and conclude foreign currency from accounts) |
Table: (3)
Impact on the net income as on 1st September:
Particulars | Amount | Amount |
Foreign exchange gain | $ 5,000 | |
Gain on foreign currency option | ($ 5,000) | |
Net gain/ (loss) | $ 0 | |
Option Income | $ 0 | |
Impact on net income | $ 0 |
Table: (4)
b.
Prepare journal entries for foreign currency option as a fair value hedge of a foreign currency payable. Identify the impact on net income over the two accounting periods.
b.
![Check Mark](/static/check-mark.png)
Explanation of Solution
The following entries need to be passed in year (June month) (Fair value hedge):
Date | Particulars | Post Ref. | Debit | Credit |
06-01-2015 | Goods Purchase | $ 85,000 | ||
Account Payable | $ 85,000 | |||
(to record Purchase of goods and 1,000,000 Francs at the spot rate of $0.085) | ||||
06-01-2015 | Foreign Currency Option | $ 2,000 | ||
Cash | $ 2,000 | |||
(To record the purchase of foreign currency option at the fair value of $0.002) | ||||
30-06-2015 | Foreign exchange loss | $ 3,000 | ||
Account Payable | $ 3,000 | |||
(To adjust the value of the Francs at Spot rate of $0.088) | ||||
09-11-2015 | Foreign Currency Option | $ 2,000 | ||
AOCI | $ 2,000 | |||
(To adjust the fair value of the option from $0.002 to $0.004 with corresponding credit to AOCI (Accumulated Other Comprehensive Income) |
Table: (5)
Impact on net income as on 30th June:
Particulars | Amount | Amount |
Purchase | $ 85,000 | |
Foreign Exchange Loss | ($ 3,000) | |
Gain on foreign currency option | $ 2,000 | |
Net gain/ (Loss) | ($ 1,000) | |
Option Income | ||
Impact on net income | $ 84,000 |
Table: (6)
Journal entries on 1st September:
Date | Particulars | Post Ref. | Debit | Credit |
09-01-2015 | Account Payable | $ 2,000 | ||
Foreign Exchange Gain | $ 2,000 | |||
(To adjust the value of the Francs payable to new spot rate of $0.090) | ||||
Account Payable | $ 5,000 | |||
Foreign Currency | $ 5,000 | |||
(To adjust the fair value of the option from $0.085 to $0.090 with corresponding credit to AOCI) | ||||
30-06-2015 | Loss on foreign currency option | $ 2,000 | ||
AOCI | $ 2,000 | |||
(To record gain on foreign currency option to affect the foreign currency loss and account payable with corresponding credit to AOCI) | ||||
09-01-2015 | Account Payable | $ 90,000 | ||
Foreign Currency | $ 90,000 | |||
(To record payment of Francs 1,000,000 supplied at spot rate) | ||||
Foreign Currency | $ 90,000 | |||
Cash | $ 85,000 | |||
Foreign Currency option | $ 5,000 | |||
(To record exercise of option @$0.085 and conclude foreign currency from accounts) |
Table: (7)
Impact on net income on 30th September:
Particulars | Amount |
Foreign exchange gain | $ 5,000 |
Net impact | $ 5,000 |
Table: (8)
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