32. (40 minutes) (Forward contract hedge of foreign currency payable)
a. Cash Flow Hedge
32. (continued)
a. Cash Flow Hedge (continued)
32. (continued)
b. Fair Value Hedge
32. (continued)
b. Fair Value Hedge (continued)
33. (30 minutes) (Option hedge of foreign currency receivable)
a. Cash Flow Hedge
6/1 Accounts Receivable (P) $62,000
Sales [$.062 x 1,000,000] $62,000
[($.066 – $.062) x 1,000,000] $4,000
AOCI $700
Foreign Currency Option $700
[($.0018 – $.0025) x 1,000,000]
Date Fair Value Intrinsic Value Time Value Change in Time Value
6/1 $2,500 $0 $2,500 –
6/30 $1,800 $0 $1,800 – $ 700
9/1 $1,000 $1,000 $0 – $1,800
33. (continued)
9/1 Foreign Exchange Loss $5,000
Accounts Receivable (P) $5,000
[($.061 – $.066) x 1,000,000]
AOCI $800
Foreign Currency Option $800
[$1,800 – $1,000]
Foreign Currency (P) $61,000
Accounts Receivable (P) $61,000
Cash $62,000
Foreign Currency (P) $61,000
Foreign Currency Option 1,000
Impact on Net Income over the Two Accounting Periods:
Sales $62,000
Gain on Foreign Currency Option 5,000
Foreign currency option expense (2 ,500)
Impact on net income $59,500 = Net cash inflow
33. (continued)
b. Fair Value Hedge
6/1 Accounts Receivable (P) $62,000
Sales [$.062 x 1,000,000] $62,000
[($.066 – $.062) x 1,000,000]
Loss on Foreign Currency Option $700
Foreign Currency Option $700
9/1 Foreign Exchange Loss $5,000
Accounts Receivable (P) $5,000
[($.061 – $.066) x 1,000,000]
Cash $62,000
Foreign Currency (P) $61,000
Foreign Currency Option 1,000
Impact on Net Income over the Two Accounting Periods:
Sales $62,000
Foreign Exchange Gain 4,000
34. (30 minutes) (Option hedge of foreign currency payable)
a. Cash Flow Hedge
6/1 Inventory [$.085 x 1,000,000] $85,000
Accounts Payable (M) $85,000
Foreign Currency Option $2,000
Cash $2,000
[$4,000 – $2,000]
AOCI $3,000
Gain on Foreign Currency Option $3,000
Option Expense $1,000*
AOCI $1,000
Date Fair Value Intrinsic Value Time Value Change in Time Value
6/1 $2,000 $0 $2,000 –
34. (continued)
9/1 Foreign Exchange Loss $2,000
Accounts Payable (M) $2,000
[($.09 – $.088) x 1,000,000]
Foreign Currency Option $1,000
AOCI $1,000
[$5,000 – $4,000]
Accounts Payable (M) $90,000
Foreign Currency (M) $90,000
Impact on net income:
Option Expense ($2,000)
34. (continued)
b. Fair Value Hedge
6/1 Inventory $85,000
Accounts Payable (M) $85,000
[$.085 x 1,000,000]
[$4,000 – $2,000]
9/1 Foreign Exchange Loss $2,000
Accounts Payable (M) $2,000
[($.09 – $.088) x 1,000,000]
Foreign Currency Option $1,000
Gain on Foreign Currency Option $1,000
[$5,000 – $4,000]
Foreign Currency (M) $90,000
Cash $85,000
Foreign Currency Option 5,000
35. (30 minutes) (Forward contract cash flow hedge of foreign currency
denominated asset)
Account Receivable (FCU) Forward Forward Contract
Spot U.S. Dollar Change in U.S. Rate to Change
in
Date Rate Value Dollar Value 4/30/16 Fair Value Fair Value
2 $52,000 – $49,000 = $3,000.
2015 Journal Entries
11/01/15 Accounts Receivable (FCU) $53,000
Sales
$53,000
There is no entry for the forward contract.
12/31/15 Foreign Exchange Loss $3,000
Accounts Receivable (FCU)
$3,000
AOCI $3,000
Gain on
Forward Contract $3,000
The impact on net income for the year 2015 is:
Sales $53,000.00
Foreign Exchange Loss (3,000.00)
Gain on Forward Contract 3 ,000.00
Net Gain (Loss) 0.00
Discount Expense (333.33)
Impact on net income $52 ,666.67
35. (continued)
2016 Journal Entries
4/30/16 Foreign Exchange Loss $1,000
Accounts Receivable (FCU)
$1,000
Discount expense $666.67
AOCI
$666.67
Foreign Currency (FCU) $49,000
Accounts Receivable (FCU)
$49,000
The impact on net income for the year 2016 is:
Foreign Exchange Loss $(1,000.00)
Gain on Forward Contract 1 ,000.00