Advanced Accounting - Standalone book
12th Edition
ISBN: 9780077862220
Author: Joe Ben Hoyle, Thomas Schaefer, Timothy Doupnik
Publisher: McGraw-Hill Education
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Chapter 9, Problem 42P
a.
To determine
Prepare
a.
Expert Solution
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.
To determine
Prepare journal entries to account for import purchase and foreign currency forward
b.
Expert Solution
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.
To determine
Prepare journal entries to account for foreign currency, forward contract firm commitment and import purchase.
c.
Expert Solution
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.
To determine
Prepare journal entries to account for import purchase and foreign currency option for cash flow.
d.
Expert Solution
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 $1.10 with corresponding credit to AOCI ( Accumulated other comprehensive income) | ||||
| Loss on foreign currency option | 10,000 | |||
| AOCI ( Accumulated other comprehensive income) | 10,000 | |||
| ( To record loss on foreign currency option to affect the foreign currency loss on account payable with corresponding credit to AOCI ( Accumulated other comprehensive income) | ||||
| Account Payable | 2,20,000 | |||
| Foreign Currency | 2,20,000 | |||
| ( To record payment of Euros 2,20,000 to supplied foreign Currency) | ||||
| Foreign Currency | 2,20,000 | |||
| Cash | 2,00,000 | |||
| Forward contract | 20,000 | |||
| (To foreign Currency option to record exercise of option and remove Foreign Currency option from accounts) |
Table: (4)
e.
To determine
Prepare journal entries to account for foreign currency option, firm commitment and import purchase.
e.
Expert Solution
Explanation of Solution
The journal entries to account for foreign currency option, firm commitment and import purchase:
| Date | Account Title and explanation | Post Ref. | Debit($) | 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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Chapter 9 Solutions
Advanced Accounting - Standalone book
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