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64. Rex Corporation, a U.S. firm with a calendar accounting year, agreed to buy a specially made truck from a
Japanese firm for delivery on February 28, 20X2 with payment due on that date. On the same date the
agreement was signed, November 1, 20X1, a forward contract due on February 28, 20X2, was also signed to
purchase 1,000,000 yen, the contract price of the truck. Exchange rates were as follows:
Date
Spot Rate
Forward Rate
11/1/X1
$0.0076
$0.0078
12/31/X1
$0.0081
$0.0080
2/28/X2
$0.0085
$0.0085
Discount rate = 8%
Required:
Prepare the journal entries needed to properly reflect the purchase and forward contract through the end of the fiscal year.
65. On January 1, 20X1, a domestic firm agrees to sell goods to a foreign customer, with delivery to be made
and payment to be received on April 1, 20X1. The goods are valued at 50,000 FC. On January 1, 20X1, the
domestic firm purchased a 90-day forward contract to sell 50,000 FC. Exchange rates on selected dates are as
follows:
Date
Spot Rate
Fwd Rate
1/1/X1
1 FC = $1.00
1FC = $0.99
2/28/X1 (year-end)
1 FC = $0.98
1FC = $0.97
4/1/X1
1 FC = $0.96
1FC = $0.96
Discount rate = 10%
Required:
Prepare the journal entries needed to properly reflect the sales transaction and the forward exchange contract. The forward contract meets the
conditions necessary to be classified as a hedge on an identifiable foreign currency commitment. Include the table to calculate the split between
exchange gains or losses on the contract due to changes in spot rates and the changes in time value.
66. Bulldog Enterprise, a U.S. firm, agreed on February 1, 20X1, to buy gears from a Mexican firm for 75,000
pesos. Delivery is scheduled for May 1, 20X1, with payment due at that time. On February 1, 20X1, Bulldog
also acquired a forward contract to buy 75,000 pesos on May 1, 20X1. (The gears represent inventory to the
U.S. firm.) Bulldog’s year end is March 31.
Required:
Prepare the journal entries necessary for Bulldog Enterprise to record this activity. Assume that the following
exchange rates existed:
Date
Spot Rate
Forward Rate
February 1, 20X1
1 peso = $0.223
1 peso = $0.227
March 31, 20X1
1 peso = $0.228
1 peso = $0.230
May 1, 20X1
1 peso = $0.226
1 peso = $0.226
Discount rate 15%
67. On November 1, 20X8 Desket, Inc. a U.S. company agreed to sell goods to a foreign buyer for 200,000 FC.
The goods were to be shipped on January 31, 20X9 with payment to be received on that day.
The hedging contract, signed on November 1, 20X8, called for the sale of 200,000 FC on January 31, 20X9.
Assume the December 31 is fiscal year end. Exchange rates are as follows:
Spot Rate
Fwd Rate
11/1/X8
$0.66
$0.69
12/31/X8
$0.67
$0.68
1/31/X8
$0.66
$0.66
Discount rate = 12%
Required:
Prepare all necessary entries through December 31, 20X8 for the commitment hedge and sale. Ignore Cost of Goods Sold.
68. On 7/1, a company forecasts the purchase of 10,000 units of inventory from a foreign vendor. The
forecasted cost is estimated to be 150,000 FC. It is estimated inventory will be delivered 11/1. Also, on 7/1, the
company purchased a call option to buy 150,000 FC at a strike price of $0.60 anytime during October. An
option premium of $2,000 was paid.
July 1
July 31
August 31
October 1
Spot
$0.58
$0.61
$0.63
$0.635
Fair Value of Option
$2,000
$2,500
$5,100
$5,500
Required:
Prepare the journal entries required through 10/1.
69. On November 1, 20X1, a U.S. company purchased inventory from a foreign supplier for 100,000 FC, with
payment to be made on January 31, 20X2, in FC. To hedge against fluctuations in exchange rates, the firm
entered into a forward exchange contract on November 1 to purchase 100,000 FC on January 31, 20X2. The
U.S. firm has a December 31 year end for accounting purposes. The following exchange rates may apply:
Date
Spot Rate
Fwd Rate
11/1/X1
$0.15
$0.13
12/31/X1
$0.16
$0.14
1/31/X2
$0.165
$0.165
Discount rate = 12%. The transaction qualifies for treatment as a cash flow hedge.
Required:
Make all the necessary journal entries for the U.S. firm relative to these events occurring between November 1, 20X1, and January 31, 20X2.
70. Differentiate between the following monetary systems: floating system, controlled float system and tiered
system.
71. Describe the risks and uncertainty a U.S. company faces when purchasing goods from a foreign corporation
and settling the transaction in the foreign currency.
72. Discuss the differences in using an option to hedge a foreign currency risk rather than a forward contract.
73. For a hedge on an exposed position, describe the process of valuing the forward contract as of the fiscal
period end date.
