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21-22. (Option cash flow hedge of a forecasted foreign currency transaction)
The easiest way to solve problems 21 and 22 is to prepare journal entries
for the option cash flow hedge of a forecasted transaction. The journal
entries are as follows:
11/1/15
Foreign Currency Option $1,500
Cash $1,500
2/1/16
Option Expense $1,100
Foreign Currency Option 900
Accumulated Other Comprehensive Income (AOCI)
$2,000
Foreign Currency (BRL) [200,000 x $.41]
$82,000
Cash
[200,000 x $.40] $80,000
Foreign
Currency Option 2,000
21-22. (continued)
Net impact on 2016 net income:
Option Expense $ (1,100)
Cost-of-Goods-Sold (82,000)
21. B
23. (10 minutes) (Foreign currency payable -- import purchase)
a. The decrease in the dollar value of the LCU payable from November 1
(60,000 x .345 = $20,700) to December 31 (60,000 x .333 = $19,980) is
24. (10 minutes) (Foreign currency receivable – export sale)
a. The ostra receivable decreases in dollar value from (50,000 x $1.05)
$52,500 at December 20 to $51,000 (50,000 x $1.02) at December 31,
25. (10 minutes) (Foreign currency receivable – export sale)
9/15 Accounts Receivable (FCU) [100,000 x $.40] $40,000
Sales $40,000
9/30 Accounts Receivable (FCU) $2,000
Foreign Exchange Gain $2,000
[100,000 x ($.42 – $.40)]
26. (10 minutes) (Foreign currency payable -- import purchase)
12/1/15 Inventory $52,800
Accounts Payable (LCU) [60,000 x $.88] $52,800
12/31/15 Accounts Payable (LCU) [60,000 x ($.82 – $.88)] $3,600
Foreign Exchange Gain $3,600
27. (15 minutes) (Determine U.S. dollar balance for foreign currency transactions)
Inventory and Cost of Goods Sold are reported at the spot rate at the date the
inventory was purchased. Sales are reported at the spot rate at the date of
a. Inventory [50,000 pesos x 40% x $.17]......................................................$3,400
b. COGS [50,000 pesos x 60% x $.17]............................................................$5,100
f. Cash [(40,000 x $.19) – (30,000 x $.20)]......................................................$1,600
28. (25 minutes) (Prepare journal entries for foreign currency transactions)
2/1/15 Equipment $17,600
Accounts Payable (L) [40,000 x $.44] $17,600
4/1/15 Accounts Payable (L) $17,600
Foreign Exchange Loss 400
Cash [40,000 x $.45] $18,000
6/1/15 Inventory $14,100
Accounts Payable (L) [30,000 x $.47] $14,100
10/1/15 Cash [30,000 x $.49] $14,700
Accounts Receivable (L) [$19,200 x 3/4] $14,400
Foreign Exchange Gain 300
Accounts Receivable (L) [10,000 x ($.52 – $.48)] $400
Foreign Exchange Gain $400
2/1/16 Cash [10,000 x $.54] $5,400
Accounts Receivable (L) [10,000 x $.52] $5,200
Foreign Exchange Gain 200
29. (20 minutes) (Determine income effect of foreign currency payable – import
purchase)
a. Benjamin, Inc. has a liability of AL 160,000. On the date that this liability
was created (December 1, 2015), the liability had a dollar value of $70,400
(AL 160,000 x $.44). On December 31, 2015, the dollar value has risen to
b. Benjamin, Inc. has a liability of AL 160,000. On the date that this liability
was created (September 1, 2015), the liability had a dollar value of
c. Benjamin, Inc. has a liability of AL 160,000. On the date that this liability
was created (September 1, 2015), the liability had a dollar value of
$73,600 (AL 160,000 x $.46). On December 31, 2015, the dollar value has
30. (30 minutes) (Foreign currency borrowing)
a. 9/30/15 Cash $100,000
Note payable (dudek) [1,000,000 x $.10] $100,000
(To record the note and conversion of 1 million
dudeks into $ at the spot rate.)
9/30/16 Interest Expense [15,000 dudeks x $.12] $1,800
Interest Payable (dudek) 525
Foreign Exchange Loss [5,000 dudeks x
($.12 – $.105)] 75
Cash [20,000 dudeks x $.12] $2,400
(To record the first annual interest payment,
30. (continued)
9/30/17 Interest Expense [15,000 dudeks x $.15] $2,250
Interest Payable (dudek) 625
Foreign Exchange Loss [5,000 dudeks x
($.15 – $.125)] 125
b. The effective cost of borrowing can be determined by considering the total
interest expense and foreign exchange losses related to the loan and
comparing this with the amount borrowed:
2015
Interest expense $525
Foreign exchange loss 5 ,000
Total $5,525 / $100,000 = 5.525% for 3 months
5.525% x 12/3 = 22.1% for 12 months
2016
Interest expense $2,425
Foreign exchange losses 20 ,075
Total $22,500 / $100,000 = 22.5% for 12 months
2017
30. (continued)
The net cash flow from this borrowing is:
Cash outflows:
Interest ($2,400 + $3,000) $5,400
Principal 150 ,000
Ignoring compounding, this results in an effective borrowing cost of approximately 27.7% per year [($55,400 /
$100,000) = 55.4% over two years;
55.4% / 2 years = 27.7% per year].
31. (40 minutes) (Forward contract hedge of foreign currency receivable)
31. (continued)
a. Cash Flow Hedge (continued)
31. (continued)
b. Fair Value Hedge
31. (continued)
b. Fair Value Hedge (continued)
