Chapter 9
Operating Activities
9-11
in whole or in part.
9.20 LIFO and FIFO Cost-Flow Assumption for Inventory. The inventory turnover
ratio for 2014 for the two cost-flow assumption methods is as follows:
FIFO
LIFO
attached to cost of goods sold. With a decade of inventory growth, older dollars
continued to be used for measuring inventory that resulted in substantially lower
9.21 Reconcile PBO/FMV of Plan Assets; Compute Pension Expense.
a. b. Pension Expense
Chapter 9
Operating Activities
9-12
in whole or in part.
c. Financial Statement Effects of Pension Accounting
Record Plan Amendment
Assets = Liabilities +Shareholders’ Equity
CC AOCI RE
Pension Liability +60,000 OCI –60,000
Record Pension Expense
Assets = Liabilities +Shareholders’ Equity
CC AOCI RE
Pension Asset +108,0
0
Pension Liability +185,000 Pension Expense –77,000
Record Liability Gain
Assets = Liabilities + Shareholders’ Equity
CC AOCI RE
Pension Liability –40,000 OCI +40,000
Record Asset Loss
Assets = Liabilities + Shareholders’ Equity
CC AOCI RE
Pension Asset –12,00 OCI –12,000
Record Cash Payment
Assets = Liabilities + Shareholders’ Equity
CC AOCI RE
Cash –100,000
Pension Asset +100,000
Chapter 9
Operating Activities
9-13
in whole or in part.
Payments to Retiring Employees
Assets = Liabilities + Shareholders’ Equity
CC AOCI RE
Pension Asset +30,000 Pension Liability +30,000
9.22 Accounting for Forward Foreign Exchange Contract as a Fair Value Hedge.
a. The purchase commitment and the forward foreign exchange contract are
accounts.
b. The change in the value of the cash flows related to the purchase commitment
increases $900, generating an income statement gain. The hedge is effective.
gain.
value of the equipment at the original intended price of $16,400.
f. Each entry involving income statement accounts in Solutions b–e would affect
Chapter 9
Operating Activities
9-14
in whole or in part.
g. To treat this contract as a fair value hedge, the firm must want to protect the
value of the equipment. Perhaps Firm A has committed to reselling the equip-
ment to a customer on June 30, 2014, for a fixed price in U.S. dollars and wants
British supplier.
Accounting for Forward Foreign Exchange Contract as a Fair Value Hedge
December 31, 2013 Revaluation
Assets = Liabilities + Shareholders’ Equity
CC AOCI RE
Purchase Commitment +900 Exchange Loss –900
Assets = Liabilities + Shareholders’ Equity
CC AOCI RE
Receivable from
Dealer +900 Exchange Gain +900
Exchange Rate Changes
Assets = Liabilities + Shareholders’ Equity
CC AOCI RE
Purchase
Commitment +200 Exchange Loss –200
Assets = Liabilities + Shareholders’ Equity
CC AOCI RE
Receivable from
Dealer +200 Exchange Gain +200
Chapter 9
Operating Activities
9-15
in whole or in part.
Acquisition of Equipment
Assets = Liabilities + Shareholders’ Equity
CC AOCI RE
Equipment +16,400
Cash –17,500
Purchase
Commitment –1,100
Settle Forward Contract
Assets = Liabilities + Shareholders’ Equity
CC AOCI RE
Cash +1,100
Receivable from
Dealer –1,100
suggests that other firms will sell whiskey for only $310 per gallon on that date.
income.
c. Inventory is written down by the same amount, resulting in a decrease in other
comprehensive income. If KG had not chosen to designate the forward
commodity contract as a hedge of the cash flows from the inventory, it would not
d. By March 31, 2014, inventory has decreased further in value [$400,000 = 10,000
e. See Solution d above.
Chapter 9
Operating Activities
9-16
in whole or in part.
balance in Other Comprehensive Income related to the inventory and the forward
contract is zero. Thus, there is no balance to transfer to earnings at this point.
to the counterparty.
h. Each of the entries in Solution b–e involving other comprehensive income would
have been made to income statement accounts instead.
Accounting for Futures Contract as a Cash Flow Hedge
December 31, 2013 Revaluation
Assets = Liabilities + Shareholders’ Equity
CC AOCI RE
Forward Contract +100,000
OCI—Forward
Commodity
Contract +100,000
Assets = Liabilities + Shareholders’ Equity
CC AOCI RE
Inventory –100,000
OCI—Forward
Commodity
Contract –100,000
Chapter 9
Operating Activities
9-17
in whole or in part.
March 31, 2014 Revaluation
Assets = Liabilities + Shareholders’ Equity
CC AOCI RE
Forward Contract +400,000
OCI—Forward
Commodity
Contract +400,000
Assets = Liabilities + Shareholders’ Equity
CC AOCI RE
Inventory –400,000
OCI—Forward
Commodity
Contract –400,000
Assets = Liabilities + Shareholders’ Equity
CC AOCI RE
Cash +500,000
Forward
Contract –500,000
Assets = Liabilities + Shareholders’ Equity
CC AOCI RE
Cash +2,700,000
Inventory –1,750,000
Sale of Revenue +2,700,000
Cost of Goods
Sold –1,750,000
9.24 Interpreting Derivatives Disclosures.
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Operating Activities
9-18
in whole or in part.
to-equity ratio, measured using market values, to minimize its weighted-average
cost of capital. (Chapter 11 discusses the cost of capital.) Alternatively, the
eliminate changes in fair values.
b. This company sells products in other countries through subsidiaries, affiliates,
and licensees. It forecasts the amount of cash it expects to receive from these
foreign entities when they sell this company’s products in the future. The U.S.
received if exchange rates had not changed. The company will then receive
c. Fair value hedges hedge changes in the fair value of existing assets or liabilities
or in the fair values of a firm commitment. This company uses interest rate
swaps to hedge changes in the fair values of long-term debt on its balance sheet.
The hedging objective relates to maintenance of a fair value, not to cash flows
hedge is for a forecasted transaction.
d. Firms must demonstrate initially that a particular derivative will effectively
hedge a particular risk if it is to be accounted for as a hedge instead of as a
speculative investment. This company discloses that none of its derivatives were
recognize the ineffective portions of cash flow hedges in earnings each period
only if the hedges are highly ineffective. Otherwise, the ineffective portion
increases or decreases accumulated other comprehensive income.
Chapter 9
Operating Activities
9-19
in whole or in part.
e. Foreign exchange contracts appear on the December 31, Year 4, balance sheet at a
exchange contracts. Thus, the initial investment in these contracts was $95 million
company also restates the fair value of the contract over time for changes in
expected exchange rates to prevail at the time of settlement, as measured by the
forward exchange rate at that time for the particular settlement date.
forecasted. The forward exchange contracts will appear as liabilities on the
company’s books to reflect the additional amounts payable to the counterparty as
a result of the increase in the value of the foreign currencies relative to the U.S.
dollar.
remittances and then assess whether the hedges were highly effective. This
company does not disclose this amount, but does disclose that the amount
included in earnings because of ineffective cash flow hedges was not significant.
Chapter 9
Operating Activities
9-20
in whole or in part.
i. The company will transfer amounts from accumulated other comprehensive
income to earnings at the time of settlement for the forward exchange contract. If
the forward exchange contracts are effective in hedging the risk of exchange rate
4 is as follows:
not significant. The disclosure that the value-at-risk model indicates a maximum
one-week loss of $17 million from adverse movements of foreign exchange rates
suggests that the firm has hedged exchange rate changes somewhat less
and exchange rate risk well during Year 4.
9.25 Interpreting Income Tax Disclosures.
a. Coca-Cola generates large tax savings from operations in countries with an
income tax rate lower than the U.S. statutory tax rate of 35% in every year, with
the largest effect occurring in 2008.
sheet for retirement benefits.