Chapter 09 – Foreign Currency Transactions and Hedging Foreign Exchange Risk – Hoyle, Schaefer, Doupnik, 13e
9-21
Education.
31. (40 minutes) (Forward contract hedge of foreign currency receivable)
a. Cash Flow Hedge
Date Journal Entry Debit Credit
12/1/17 Accounts Receivable (K) 43,200.00
Sales Revenue 43,200.00
To revalue the foreign currency account receivable
and recognize a foreign exchange gain.
AOCI 1,960.60
Forward Contract 1,960.60
To record the change in fair value of the forward
AOCI 400.00
Premium Revenue 400.00
To allocate the forward contract premium as revenue
over the life of the contract.
Impact on 2017 net income:
Sales Revenue $43,200.00
9-23
31. (continued)
b. Fair Value Hedge
Date Journal Entry Debit Credit
12/1/17 Accounts Receivable (K) 43,200.00
Sales Revenue 43,200.00
To record sales revenue and a foreign currency
account receivable.
9-24
Education.
31. (continued)
b. Fair Value Hedge (continued)
Date Journal Entry Debit Credit
3/1/18 Accounts Receivable (K) 2,400.00
Foreign Exchange Gain 2,400.00
To revalue the foreign currency account receivable
and recognize a foreign exchange gain.
Chapter 09 – Foreign Currency Transactions and Hedging Foreign Exchange Risk – Hoyle, Schaefer, Doupnik, 13e
9-25
Education.
32. (40 minutes) (Forward contract hedge of foreign currency payable)
a. Cash Flow Hedge
Date Journal Entry Debit Credit
12/1/17 Cost of Goods Sold 43,200.00
Accounts Payable (K) 43,200.00
To record the purchase of materials immediately
as cost of goods sold and record a foreign currency
To record the change in fair value of the forward
contract as an asset.
AOCI 1,600.00
Gain on Forward Contract 1,600.00
To record a gain on forward contract to offset the
foreign exchange loss.
9-27
32. (continued)
b. Fair Value Hedge
Date Journal Entry Debit Credit
12/1/17 Cost of Goods Sold 43,200.00
Accounts Payable (K) 43,200.00
To record the purchase of materials immediately
as cost of goods sold and record a foreign currency
account payable.
No entry for the forward contract.
12/31/17 Foreign Exchange Loss 1,600.00
Accounts Payable (K) 1,600.00
To revalue the foreign currency account payable
9-28
Education.
32. (continued)
b. Fair Value Hedge (continued)
Date Journal Entry Debit Credit
3/1/18 Foreign Exchange Loss 2,400.00
Accounts Payable (K) 2,400.00
To revalue the foreign currency account payable
and recognize a foreign exchange loss.
Accounts Payable (K) 47,200.00
Foreign Currency (K) 47,200.00
To record the payment of korunas to the foreign
supplier.
Chapter 09 – Foreign Currency Transactions and Hedging Foreign Exchange Risk – Hoyle, Schaefer, Doupnik, 13e
9-29
Education.
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
Foreign Currency Option 2,500
Cash 2,500
6/30 Accounts Receivable (P) 4,000
Foreign Exchange Gain
9-30
Education.
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
Impact on Net Income over the Two Accounting Periods:
Sales $62,000
Foreign Exchange Gain 4,000
9-31
Education.
33. (continued)
b. Fair Value Hedge
6/1 Accounts Receivable (P) 62,000
Sales [$.062 x 1,000,000] 62,000
Foreign Currency Option 2,500
Cash 2,500
6/30 Accounts Receivable (P) 4,000
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
Chapter 09 – Foreign Currency Transactions and Hedging Foreign Exchange Risk – Hoyle, Schaefer, Doupnik, 13e
9-32
Education.
34. (30 minutes) (Option hedge of foreign currency payable)
a. Cash Flow Hedge
Date Fair Value Intrinsic Value Time Value Change in Time Value
6/1 $2,000 $0 $2,000 –
6/30 $7,000 $6,000 $1,000 -$1,000*
9/1 $20,000 $20,000 $0 -$1,000**
AOCI 6,000
Gain on Foreign Currency Option 6,000
Option Expense 1,000*
AOCI 1,000
Chapter 09 – Foreign Currency Transactions and Hedging Foreign Exchange Risk – Hoyle, Schaefer, Doupnik, 13e
9-33
Education.
34. (continued)
9/1 Foreign Exchange Loss 14,000
Accounts Payable (francs) 14,000
[($.872 – $.858) x 1,000,000]
Foreign Currency Option 13,000
Chapter 09 – Foreign Currency Transactions and Hedging Foreign Exchange Risk – Hoyle, Schaefer, Doupnik, 13e
9-34
Education.
34. (continued)
b. Fair Value Hedge
6/1 Inventory [$.852 x 1,000,000] 852,000
Accounts Payable (francs) 852,000
Foreign Currency Option 2,000
[($.872 – $.858) x 1,000,000]
Foreign Currency Option 13,000
Gain on Foreign Currency Option 13,000
[$20,000 – $7,000]
Chapter 09 – Foreign Currency Transactions and Hedging Foreign Exchange Risk – Hoyle, Schaefer, Doupnik, 13e
9-35
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 4/30/18 Fair Value Fair Value
11/01/17 $.21 $21,000 – $.20 $0 –
2017 Journal Entries
11/01 Accounts Receivable (FCU) 21,000.00
Sales 21,000.00
There is no entry for the forward contract.
12/31 Foreign Exchange Loss 2,000.00
Accounts Receivable (FCU) 2,000.00
The impact on net income for the year 2017 is:
Sales $21,000.00
Foreign Exchange Loss (2,000.00)
Gain on Forward Contract 2,000.00
9-36
35. (continued)
2018 Journal Entries
4/30 Foreign Exchange Loss 1,000.00
Accounts Receivable (FCU) 1,000.00
AOCI 883.00
Forward Contract 883.00
AOCI 1,000.00
9-37
Education.
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 1/31/18 Fair Value Fair Value
11/30/17 $265,000 ($159,000) – $.52 $0 –
2017 Journal Entries
11/30 Accounts Receivable (mongs) 265,000
Sales 265,000
[$.53 x 500,000]
Inventory 159,000
Accounts Payable 159,000
Chapter 09 – Foreign Currency Transactions and Hedging Foreign Exchange Risk – Hoyle, Schaefer, Doupnik, 13e
9-38
36. (continued)
2018 Journal Entries
1/31 Foreign Exchange Loss 5,000
Accounts Receivable (mongs) 5,000
Accounts Payable (mongs) 3,000
Foreign Exchange Gain 3,000
Loss on Forward Contract 1,921
9-39
37. (40 minutes) (Forward contract fair value hedge – foreign currency receivable
and firm commitment (sale))
a. Foreign Currency Receivable
Account Receivable (ruble) Forward Forward Contract
Spot U.S. Dollar Change in U.S. Rate to Change in
Date Rate Value Dollar Value 1/31/18 Fair Value Fair Value
10/01/17 $.35 $35,000 – $.39 $0 –
10/01 Accounts Receivable (ruble) 35,000.00
Sales 35,000.00
[100,000 x $.35]
Forward Contract 1,980.20
[($.41 – $.39) x 100,000 x .9901]
1/31 Accounts Receivable (ruble) 2,000.00
Foreign Exchange Gain 2,000.00
[($.40 – $.38) x 100,000]
9-40
Education.
37.a. (continued)
The overall impact on net income is:
Sales $35,000.00
Foreign Exchange Gain 5,000.00
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.
12/31 Loss on Forward Contract 1,980.20
Forward Contract 1,980.20
Firm Commitment 1,980.20
Gain on Firm Commitment 1,980.20
1/31 Forward Contract 980.20