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Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
Impact on net income over both periods: $176.36 + ($20,976.36) = $20,800; equal to cash
outflow.
16. Alexandria Company – Forward Contract Cash Flow Hedge of Foreign Currency
Denominated Asset
Account Receivable (franc) Forward Forward Contract
Spot U.S. Dollar Change in U.S. Rate to Change in
Date Rate Value Dollar Value 4/30/Y2 Fair Value Fair Value
Year 1 Journal Entries
Year 2 Journal Entries
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Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
The impact on net income for Year 2 is:
17. Artco Inc. – Forward Contract Fair Value Hedge of Net Foreign Currency
Denominated Asset
Account Receivable (Payable) (ricas) Forward Forward Contract
Change in U.S. Rate to Change in
Date U.S. Dollar Value Dollar Value 3/1/Y2 Fair Value Fair Value
Year 1 Journal Entries
12/31/Y1
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Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
The impact on net income for Year 1 is:
Sales $52,000.00
Year 2 Journal Entries
1/31/Y2 Foreign Exchange Loss $4,000
The impact on net income for the year Year 2 is:
18. Butterworth Company
a. Forward Contract Fair Value Hedge of Foreign Currency Receivable
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Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
b. Forward Contract Fair Value Hedge of Foreign Currency Firm Sales Commitment
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Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
Impact on Net Income:
Sales $7,200
19. Huntington Corporation – Forward Contract Fair Value Hedge of a Foreign Currency
Firm Purchase Commitment
Forward Forward Contract Firm Commitment
Rate to Change in Change in
Date 10/31/Y1 Fair Value Fair Value Fair Value Fair Value
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Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
20. Tsanumis Corporation – Option Fair Value Hedge of a Foreign Currency Firm Sale
Commitment
Firm Commitment Option Foreign Currency Option
Spot Change in Premium Change in
Date Rate Fair Value Fair Value for 9/1/Y1 Fair Value Fair Value
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Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
21. Zermatt Company – Option Fair Value Hedge of a Foreign Currency Firm Purchase
Commitment
Firm Commitment Option Foreign Currency Option
Spot Change in Premium Change in
Date Rate Fair Value Fair Value for 12/20 Fair Value Fair Value
11/20 $.80 - - $.008 $800 -
a. The option strike price ($.80) is less than the spot rate ($.83) on December 20, the date the
parts are to be paid for. Therefore, Zermatt will exercise its option. The journal entries are
as follows:
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Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
b. The option strike price ($.80) is greater than the spot rate ($.78) on December 20, the date
the parts are to be paid for. Therefore, Zermatt will allow the option to expire unexercised.
Foreign currency will be acquired at the spot rate on December 20. The journal entries are
as follows:
22. Garnier Corporation – Option Cash Flow Hedge of Forecasted Transaction
Option
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Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
Date Fair Value Intrinsic Value Time Value Change in Time Value
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Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
Net cash inflow from export sale: $145,000 = ($150,000 - $5,000)
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