# Accounting Chapter 10 Homework The hedge on the foreign currency transaction:

Type Homework Help
Pages 9
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Authors Paul M. Fischer, Rita H. Cheng, William J. Tayler

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10–13 Ch. 10—Problems
PROBLEM 10-3
(1) The foreign currency transaction:
March
April
Sales (200,000 euros × \$1.180) ............................................... \$236,000 \$
Cost of goods sold .................................................................... 160,000
(2) The hedge on the foreign currency transaction:
(3) The foreign currency commitment:
(4) The hedge on the foreign currency commitment:
March April
Gain (loss) on forward contract (see Schedule B) .................... \$593 \$896
Net income effect ...................................................................... \$593 \$896
Schedule A for Part (2)
March 1 March 31 April 30
Number of FC ................................................... 200,000 200,000 200,000
Forward rate remaining time—1 FC ................. \$1.181 \$1.178 \$1.175
Fair value of original contract:
Original forward rate ............................................................. \$236,200 \$236,200
Current forward rate ............................................................. 235,600 235,000
Change—gain (loss) in forward rate .................................... \$ 600 \$ 1,200
Problem 10-3, Concluded
Schedule B for Parts (3 and 4)
March 15 March 31 April 30
Number of FC ................................................... 300,000 300,000 300,000
Forward rate remaining time—1 FC ................. \$1.179 \$1.177 \$1.174
Fair value of original contract:
Original forward rate ............................................................. \$353,700 \$353,700
Present value of change:
n = 2.5, i = 0.50% ................................................................. \$ 593
n = 1.5, i = 0.50% ................................................................. \$ 1,489
Change in value from prior period:
PROBLEM 10-4
June 1 Inventory—Reconditioned Equipment ..................................... 158,400
Accounts Payable .............................................................. 158,400
To record purchase of the equipment when
1 CA\$ = \$0.720. (220,000 × \$0.720)
Problem 10-4, Continued
June 15 Memo: Committed to buy equipment
Memo: Company acquired a forward contract to buy 400,000 CA\$ at a forward rate
of 1 CA\$ = \$0.731.
20 Inventory—Reconditioned Equipment ..................................... 21,960
Cash .................................................................................. 21,960
To record the cost to refurbish the equipment when
1 CA\$ = \$0.732. (30,000 × \$0.732)
30 Foreign Currency ..................................................................... 220,500
Accounts Receivable ......................................................... 216,000
Exchange Gain .................................................................. 4,500
To settle the accounts receivable when
1 CA\$ = \$0.735. (300,000 × \$0.735)
Loss on Contract ..................................................................... 1,800
Forward Contract ............................................................... 1,800
To record change in value of the June 1 contract
[300,000 CA\$ × (\$0.735 – \$0.729)].
Ch. 10—Problems 10–16
Problem 10-4, Concluded
June 30 Loss on Firm Commitment ...................................................... 2,388
Firm Commitment .............................................................. 2,388
To record the loss on the commitment
(see Schedule A).
Schedule A
June 15 June 30
Number of FC ...................................................................... 400,000 400,000
Forward rate remaining time—1 FC ..................................... \$0.731 \$0.737
Fair value of original contract:
Original forward rate ....................................................... \$292,400
PROBLEM 10-5
For each option March 1 March 31 May 31
Notational amount .................................................... 200,000 200,000 200,000
Strike price ............................................................... \$2.52 \$2.52 \$2.52
1st Quarter 2nd Quarter 3rd Quarter Total
Related to the commitment:
Gain (loss) on commitment ............... \$(7,960) \$(6,040) \$ (14,000)
Gain (loss on option transferred from
OCI to offset gain or loss on
commitment .................................. 4,000 6,000 10,000
Gain (loss) in time value .................... (300) (1,000) (1,300)
Sales revenue (10,000 × \$90) ........... \$ 900,000 900,000
Cost of Sales:
Original cost (200,000 FC × \$2.57) (514,000) (514,000)
Adjustment for change in value of
commitment .............................. 14,000 14,000
over 10 years is \$44,000 per year.
\$44,000 per year × 3/12 of a year \$ (11,000) (11,000
Allocation of OCI equal to change in
intrinsic value of \$10,000 over
depreciable life of asset.
Problem 10-5, Concluded
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Related to the note payable:
Gain (loss) on note payable:
200,000 FC × (\$2.54 – \$2.50) ...... \$(8,000) \$ (8,000)
200,000 FC × (\$2.57 – \$2.54) ...... \$(6,000) (6,000)
Gain (loss) on option transferred from
10–19 Ch. 10—Problems
PROBLEM 10-6
Dr (Cr) Dr (Cr)
Without With Hedging
(\$1.55 – \$1.52)] ............................................... 3,000
(\$1.55 \$1.50)] ............................................... \$ 5,000 \$ 5,000 \$ 5,000
(a) Gain /loss on option (\$4,000 – \$800) ................... (3,200)
(b) Gain/loss on forward contract .............................. (3,000)
Total impact on earnings—Debit (Credit) ............ \$ 5,000 \$ 1,800 \$ 2,000
Hypothetical B:
Balance sheet accounts:
Inventory .............................................................. \$ 150,000 \$ 150,000 \$ 150,000
Accounts payable ................................................ (155,000) (155,000) (155,000)
(a) Derivative—option ............................................... 4,000
(a) Other comprehensive income—option ................ (4,000)
(a) Transfer of OCI to offset impact on earnings ....... 4,000
Problem 10-6, Continued
Dr (Cr) Dr (Cr)
Without With Hedging
Hedging Option Forward
(\$1.48 \$1.40)] ............................................... 8,000
(b) Other comprehensive income—forward .............. (10,000)
(b) Transfer of OCI to offset impact on earnings ....... 10,000
Net assets excluding cash balances .................... \$ \$ 10,000 \$ 8,000
Problem 10-6, Concluded
Dr (Cr) Dr (Cr)
Without With Hedging
Hedging Option Forward
Hypothetical D:
Balance sheet accounts:
Note receivable (100,000 FC × \$1.40) ................ \$ 140,000 \$ 140,000
Income statement accounts:
Exchange gain/loss on note receivable
[100,000 FC × (1.40 – \$1.50)] ......................... \$ 10,000 \$ 10,000
Interest income (100,000 FC × 6% ×
3/12 year × \$1.40) ........................................... (2,100) (2,100)
Gain/loss on option—time value .......................... 1,000
Gain/loss on option—transferred from OCI ......... (10,000)
Total impact on earnings—Debit (Credit) ............ \$ 7,900 \$ (1,100)
Hypothetical E:
Balance sheet accounts:
Income statement accounts:
Sales revenue:
Initial value (100,000 FC × \$1.40) ................... \$(140,000) \$(140,000)
Ch. 10—Problems 10–22
PROBLEM 10-7
(1) 1st Memo: Company acquired a forward contract to sell 600,000 FC at a forward
30 days rate of 1 FC = \$1.89.
(\$1.890 – \$1.910) = 12,000]. NPV when
n = 2 and i = 6%/12 = \$11,881.
(\$1.890 – \$1.900)] = 6,000. NPV when
n = 1 and i = 6%/12 = \$5,970 loss less
the previously recognized loss of \$11,881
Problem 10-7, Continued
Last Foreign Currency ................................................... 2,220,000
30 days Exchange Loss ...................................................... 36,000
Accounts Receivable ....................................... 2,256,000
To record collection of receivable when
Forward Contract ................................................... 29,970
Gain on Forward Contract ............................... 29,970
Discount Expense .................................................. 1,996
Gain on Forward Contract ............................... 1,996
Problem 10-7, Concluded
(2) Hedged Not Hedged
Sales revenue (600,000 FC × \$1.880) ............................... \$1,128,000 \$1,128,000
Adjustment to sales revenue .............................................. (1,970)
Adjusted sales revenue ...................................................... \$1,126,030 \$1,128,000
Target
Hedged
Sales revenue (600,000 FC × \$1.900) ............................... \$1,140,000 \$1,128,000
Adjustment to sales revenue .............................................. (1,970)
Adjusted sales revenue ...................................................... \$1,140,000 \$1,126,030
Cost of sales (1/2 of \$1,800,000) ........................................ (900,000) (900,000)

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