36. (30 minutes) (Forward contract fair value hedge of net foreign currency
denominated asset)
Account Receivable (Payable) (mongs) Forward Forward Contract
Change in U.S. Rate to Change in
Date U.S. Dollar Value Dollar Value 1/31/16 Fair Value Fair Value
11/30/15 $265,000 ($159,000) – $.52 $0 –
2 $104,000 – $98,000 = $6,000.
2015 Journal Entries
11/30 Accounts Receivable (mongs) $265,000
Sales
$265,000
[$.53 x 500,000]
There is no formal entry for the forward contract.
12/31 Foreign Exchange Loss $15,000
Accounts
Receivable (mongs) $15,000
The impact on net income for the year 2015 is:
Sales $265,000
Net Foreign Exchange Loss $ (6,000)
Gain on Forward Contract 7 ,921
Net Gain (Loss) 1 ,921
36. (continued)
2016 Journal Entries
1/31 Foreign Exchange Loss $5,000
Accounts
Receivable (mongs) $5,000
Foreign Currency (mongs) $245,000
Accounts
Receivable (mongs) $245,000
The impact on net income for the year 2016 is:
Net Foreign Exchange Loss $(2,000)
Loss on Forward Contract (1 ,921)
Impact on net income $(3 ,921)
The net effect on the balance sheet is an increase in cash of $104,000 and an
increase in inventory of $159,000 with a corresponding increase in retained
earnings of $263,000 ($266,921 – $3,921).
Sales $69,000
[100,000 x $.69]
Loss on Forward Contract $8,910.90
Forward Contract $8,910.90
[($.74 – $.65) x 100,000 x .9901]
1/31 Accounts Receivable (LCU) $1,000
Foreign Exchange Gain $1,000
[($.72 – $.71) x 100,000]
Accounts Receivable (LCU) $72,000
Cash $65,000
Forward Contract $7,000
Foreign Currency (LCU) $72,000
The impact on net income:
Sale $69,000.00
Foreign Exchange Gain 3,000.00
37. (continued)
b. Foreign Currency Firm Commitment (Sale)
10/01 There is no entry to record either the sales agreement or the
forward contract as both are executory contracts.
Gain on Firm Commitment $8,910.90
1/31 Forward Contract $1,910.90
Gain on Forward Contract $1,910.90
Cash $65,000
Forward Contract $7,000
Foreign Currency (LCU) $72,000
Adjustment to Net Income $7,000
Firm Commitment $7,000
Impact on Net Income:
38. (30 minutes) (Forward contract fair value hedge of a foreign currency firm
commitment (purchase))
Forward Forward Contract Firm Commitment
Rate to Change in Change in
Date 10/31 Fair Value Fair Value Fair Value Fair Value
8/1 $.30 $0 – $0 $0 –
a. Journal entries
8/1 There is no entry to record either the purchase agreement or the
forward contract as both are executory contracts.
9/30 Forward Contract $4,950.50
Contract $4,950.50
10/31 Loss on Forward Contract $950.50
Forward
Contract $950.50
Firm Commitment $950.50
Gain on Firm
Commitment $950.50
Contract 4,000
Inventories (Cost-of-Goods-Sold) $64,000
Foreign
Currency (rupees) $64,000
Firm Commitment $4,000
Adjustment to Net Income
$4,000
b. Assuming the inventory is sold in the fourth quarter, the net impact on net
income is negative $60,000:
c. The net cash outflow is $60,000.
39. (30 minutes) (Option fair value hedge of a foreign currency firm commitment
(sale))
Firm Commitment Option Option
Spot Change in Premium Change in
Date Rate Fair Value Fair Value for 9/1 Fair Value Fair Value
2 $88,000 – $100,000 = $(12,000).
a. Journal Entries
6/1 Foreign Currency Option $2,000.00
Cash
$2,000.00
There is no entry to record the sales agreement
because it is an executory contract.
Commitment $5,881.80
Foreign Currency Option $800.00
Gain on
Foreign Currency Option $800.00
9/1 Loss on Firm Commitment $6,118.20
Firm
Commitment $6,118.20
$88,000.00
Cash $100,000.00
Foreign
Currency (lek) $88,000.00
Foreign
Currency Option 12,000.00
39. (continued)
b. Impact on Net Income
The impact on net income for the second quarter is:
Loss on Firm Commitment $(5,881.80)
Gain on Foreign Currency Option 800.00
Impact on net income $(5 ,081.80)
The impact on net income for the third quarter is:
Sales $88,000.00
The impact on net income over the second and third quarters is:
$98,000 ($103,081.80– $5,801.80)
c. Net Cash Inflow
The net cash inflow resulting from the sale is:
$98,000 ($100,000 – $2,000)
40. (20 minutes) (Option fair value hedge of a foreign currency firm commitment
(purchase))
Firm Commitment Option Option
Spot Change in Premium Change in
Date Rate Fair Value Fair Value for 12/20 Fair Value Fair Value
11/20 $.20 – – $.008 $400 –
3The premium on 12/20 for an option that expires on that date is equal to the option’s
intrinsic value. Given the spot rate on 12/20 of $.21, a call option with a strike price of
$.20 has an intrinsic value of $.01 per pijio.
4The premium on 12/20 for an option that expires on that date is equal to the option’s
11/20 Foreign Currency Option $400
Cash $400
There is no entry to record the purchase agreement
because it is an executory contract.
Foreign Currency Option 500
Parts inventory $10,500
Foreign Currency (pijio) $10,500
The following entry is made in the period when the inventory affects net
income through cost-of-goods-sold:
40. (continued)
b. The option strike price ($.20) is greater than the spot rate ($.18) on December
20, the date the parts are to be paid for. Therefore, Big Arber 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:
11/20 Foreign Currency Option $400
Cash $400
There is no entry to record the purchase agreement
because it is an executory contract.
12/20 Firm Commitment $1,000
Gain on Firm Commitment $1,000
Loss on Foreign Currency Option $400
41. (20 minutes) (Option cash flow hedge of a forecasted transaction)
a.
12/15/15 Foreign Currency Option $5,000
Cash [1 million marks x $.005] $5,000
No journal entry related to the forecasted
transaction.
3/15/16 Foreign Currency Option $2,000
AOCI $2,000
To recognize the increase in the value of the
Foreign Currency Option with the counterpart
recorded in AOCI.
Option Expense $4,000
AOCI $4,000
41. (continued)
AOCI $10,000
Adjustment to Net Income $10,000
To transfer the amount accumulated in AOCI
as an adjustment to net income in the period
in which the forecasted transaction occurs.
The impact on net income over the two periods is $(585,000).
c. Net cash outflow for parts: $585,000 = ($5,000 + $580,000)
42. (60 minutes) (Unhedged foreign currency transaction; forward contract and
option hedge of foreign currency liability; forward contract and option hedge
of foreign currency firm commitment (purchase))
Part a. Foreign Currency Liability (Unhedged)
9/15 Inventory $200,000
Accounts Payable (euro) $200,000
9/30 Foreign Exchange Loss $10,000
Accounts Payable (euro) $10,000
42. (continued)
Part b. Forward Contract Fair Value Hedge of a Foreign Currency Liability
Accounts Payable (C) Forward Forward Contract
Spot U.S. Dollar Change in U.S. Rate to Change in
Date Rate Value Dollar Value 10/31 Fair Value Fair Value
9/15 $1.00 $200,000 – $1.06 $0 –
9/15 Inventory $200,000
Accounts Payable (euro)
$200,000
There is no formal entry for the forward contract.
10/31 Foreign Exchange Loss $10,000
Accounts
Payable (euro) $10,000
Forward Contract $2,059.40
Gain on
Forward Contract $2,059.40