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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)
Adjustment of OCI ........................................... (10,000)
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)
