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)