57. Lion Corporation, a U.S. firm, entered into several foreign currency transactions during the year. Determine
the effect of each transaction on net income for that current accounting year only. Lion has a June 30 year end.
Required:
a.
On January 15, Lion sold $30,000 (Canadian) in merchandise to a Canadian firm, to be paid for on February 15 in Canadian dollars.
Canadian dollars were worth $0.85 (U.S.) on January 15 and $0.82 (U.S.) on February 15.
b.
On June 1, Lion purchased and received a computer costing 100,000 euros from a German firm. Lion paid for the computer on August
1. On June 1, to reduce exchange risks, Lion purchased a contract to buy 100,000 marks in 60 days. Exchange rates are as follows:
Spot
Forward
6/1
$0.53
$0.60
6/30
$0.54
$0.58
Discount rate = 6%
c.
On June 1, Lion sold merchandise to a customer for 100,000 FC and purchased an option to sell 100,000 FC in 60 days to hedge the
receivable. The option sold for a premium of $6,500 and a strike price of $1.20. The value of the option 6/30 was $12,500. The spot
rate on June 1 was $1.19 and $1.25 on June 30.
Exchange loss on sale: $900 [30,000 x (.82 – .85)]
b.
Exchange loss on exposed payable [100,000 x (.54 – .53)]
$(1,000)
Loss on forward contract
(1,990)
Net loss
$(2,990)
The value of the Forward Contract Receivable-FC on 6/30 is
58,000 compared to 60,000 on 6/1, a loss in value of 2,000. The
present value of that change is 1,990 (n = 1, i = .06/12).
Exchange gain on exposed receivable
[100,000 x (1.25 – 1.19)]
$6,000
58. Wolters Corporation is a U.S. corporation that purchased 50,000 chocolate bars from a foreign manufacturer
on 6/1/X9 for 80,000 foreign currency units, to be paid on 9/1/X9. On 6/1/X9 Wolters also entered into a
forward contract to purchase 80,000 foreign currency units on 9/1/X9. Wolters has a July 31 year end.
Exchange rates are as follows:
Date
Spot Rate
Fwd Rate
6/1/X9
$0.64
$0.645
7/31/X9
$0.66
$0.68
9/1/X9
$0.69
$0.69
Discount rate = 12%
Required:
Make the necessary journal entries for Wolters for the period June 1 through September 1, 20X9.
June 1
Inventory
51,200
Accounts Payable
51,200
80,000 FC at a forward rate of $0.645
July 31
Exchange Loss
1,600
Accounts Payable
1,600
Forward Contract
2,772
Gain on Contract
2,772
Sept. 1
Forward Contract
828
Gain on Contract
828
Foreign Currency (80,000 x .69)
55,200
Forward Contract
3,600
Cash (80,000 x .645)
51,600
59. 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%
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.
Nov. 1
Inventory
15,000
Accounts Payable
15,000
Memo: Company acquired a forward contract to buy
100,000 FC at a forward rate of $0.13
Dec. 31
Exchange Loss [100,000 x (.16 – .15)]
1,000
Accounts Payable
1,000
Forward Contract
990
Gain on Contract
990
Jan. 31
Forward Contract
2,510
Gain on Contract
2,510
Foreign Currency (100,000 x .165)
16,500
Forward Contract
3,500
Cash (100,000 x .13)
13,000
Accounts Payable (15,000 + 1,000)
16,000
Exchange Loss
500
Foreign Currency
16,500
11/1
12/31
1/31
# of FC
100,000
100,000
100,000
Spot Rate
.15
.16
.165
Forward Rate-Remaining Time
.13
.14
.165
Initial Forward Rate
.13
.13
Fair Value of Fwd Contract:
Original
13,000
13,000
Current
14,000
16,500
Present Value of Change:
n = 1, i = .12/12 (1,000 / 1.01)
990
n = 2, i = .12/12
3,500
Change in Value:
Current Present Value
990
3,500
Prior Present Value
0
990
Change in Present Value
990
2,510
60. On November 1, 20X1, a U.S. company sold merchandise to a foreign firm for 100,000 FC with payment to
be made on January 31, 20X2, in FC. To hedge against fluctuations in exchange rates, the firm also entered into
a forward exchange contract on November 1, 20X1 to sell 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
$0.17
12/31/X1
$0.16
$0.175
1/31/X2
$0.165
$0.165
Discount rate = 10%
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.
Nov. 1
Accounts Receivable (100,000 x .15)
15,000
Sales
15,000
Memo: Company acquired a forward contract to sell
100,000 FC at a forward rate of $0.17
Dec. 31
Accounts Receivable [100,000 x (.16 – .15)]
1,000
Exchange Gain
1,000
Loss on Contract
496
Forward Contract
496
Jan. 31
Foreign Currency (100,000 x .165)
16,500
Accounts Receivable (15,000 + 1,000)
16,000
Exchange Gain
500
Forward Contract
996
Gain on Contract
996
Cash (100,000 x .17)
17,000
Forward Contract
500
Foreign Currency (100,000 x .165)
16,500
61. Blue & Green, Inc. sold merchandise for 100,000 FC to a foreign vendor on December 1, 20X5. Payment in
FC is due January 31, 20X6. On December 1, 20X5, Blue & Green signed an agreement with a foreign
exchange broker to sell 100,000 FC on January 30, 20X6. Exchange rates to sell 1 FC are as follows:
Date
Spot Rate
Fwd Rate
12/1/X5
$1.45
$1.40
12/31/X5
$1.43
$1.35
1/31/X6
$1.41
$1.41
Fiscal Year End is 12/31; Discount rate = 12%
Required:
Prepare the journal entries for December 1 through January 31 related to the events described above. Ignore Cost of Goods Sold.
20X5
Dec. 1
Accounts Receivable (100,000 x 1.45)
145,000
Sales
145,000
Memo: Company acquired a forward contract to sell
100,000 FC at a forward rate of $1.40
Dec. 31
Exchange Loss [100,000 x (1.43 – 1.45)]
2,000
Accounts Receivable
2,000
Forward Contract
4,950
Gain on Contract
4,950
Jan. 31
Loss on Contract
5,950
Forward Contract
5,950
Cash (100,000 x 1.40)
140,000
Forward Contract
1,000
Foreign Currency (100,000 x 1.41)
141,000
Foreign Currency (100,000 x 1.41)
141,000
Exchange Loss
2,000
Accounts Receivable (145,000 – 2,000)
143,000
62. Wolters Corporation is a U.S. corporation that purchased 50,000 chocolate bars from a foreign manufacturer
on 6/1/X9 for 80,000 foreign currency units, to be paid on 9/1/X9. On 6/1/X9 Wolters also entered into a
forward contract to purchase 80,000 foreign currency units on 9/1/X9. Wolters has a July 31 year end.
Exchange rates are as follows:
Date
Spot Rate
Option Price
6/1/X9
$0.64
$800
7/31/X9
$0.66
$1,500
9/1/X9
$0.69
$3,600
The option strike price was $0.645.
Required:
Make the necessary journal entries for Wolters for the period June 1 through September 1, 20X9.
Inventory (80,000 x .64)
51,200
Accounts Payable
51,200
Investment in Option
800
Cash
800
July 31
Exchange Loss [80,000 x (.66 – .64)]
1,600
Accounts Payable
1,600
Investment in Option (1,500 – 800)
700
Gain on Option
700
Sept. 1
Investment in Option (3,600 – 1,500)
2,100
Gain on Option
2,100
Foreign Currency (80,000 x .69)
55,200
Investment in Option
3,600
Cash (80,000 x .645)
51,600
63. Blue & Green, Inc. sold merchandise for 100,000 FC to a foreign vendor on December 1, 20X5. Payment in
FC is due January 31, 20X6. On December 1, 20X5, Blue & Green purchased an option for $500 to sell 100,000
FC at $1.45 on January 30, 20X6. Exchange rates to sell 1 FC are as follows:
Date
Spot Rate
Option Value
12/1/X5
$1.45
$500
12/31/X5
$1.43
$2,200
1/31/X6
$1.41
$4,000
Fiscal Year End is 12/31.
Required:
Prepare the journal entries for December 1 through January 31 related to the events described above. Ignore Cost of Goods Sold.
20X5
Dec. 1
Accounts Receivable (100,000 x 1.45)
145,000
Sales
145,000
Investment in Option
500
Cash
500
Dec. 31
Exchange Loss [100,000 x (1.43 – 1.45)]
2,000
Accounts Receivable
2,000
Investment in Option (2,200 – 500)
1,700
Gain on Option
1,700
Jan. 31
Investment in Option (4,000 – 2,200)
1,800
Gain on Option
1,800
Cash (100,000 x 1.45)
145,000
Investment in Option
4,000
Foreign Currency (100,000 x 1.41)
141,000