Part 2 MULTINATIONAL ACCOUNTING
592
AND
OTHER REPORTING CONCERNS
PROBLEMS
Problem 10-1 (LO 5) FC transactions, commitments, forecasted transactions—
earnings impact. Jarvis Corporation transacts business with a number of foreign vendors and
customers. These transactions are denominated in FC, and the company uses a number of hedging
strategies to reduce the exposure to exchange rate risk. Several such transactions are as follows:
Transaction A: On November 30, the company purchased inventory from a vendor in the
amount of 100,000 FC with payment due in 60 days. Also on November 30, the company purchased a forward contract to buy FC in 60 days. Assume a fair value hedge.
Transaction B: On November 1, the company committed to provide services to a foreign
customer in the amount of 100,000 FC. The services will be provided in 30 days. On November 1, the company also purchased a forward contract to sell 100,000 FC in 30 days. Changes
in the value of the commitment are based on changes in forward rates.
Transaction C: On November 1, the company forecasted a purchase of equipment in 30
days. The forecasted cost is 100,000 FC, and the equipment is to be depreciated over five years
using the straight-line method of depreciation. On November 1, the company acquired a forward contract to buy 100,000 FC in 30 days.
Transaction D: On November 30, the company purchased an option to sell 100,000 FC in
60 days to hedge a forecasted sale to a customer in 60 days. The option sold for a premium of
$1,200 and had a strike price of $1.155. The value of the option on December 31 was $2,000.
Relevant spot and forward rates are as shown below.
Forward Rate for 30 Days
from November 1
Spot Rate
November 1 . . . . . . . . . . . . .
November 15 . . . . . . . . . . . .
November 30 . . . . . . . . . . . .
December 31. . . . . . . . . . . . .
Required
1 FC ¼ $1.120
1 FC ¼ $1.130
1 FC ¼ $1.150
1 FC ¼ $1.140
Forward Rate for 60 Days
from November 30
1 FC ¼ $1.132
1 FC ¼ $1.146
1 FC ¼ $1.138
Assuming that the company’s year-end is December 31, for each of the above transactions determine the current-year effect on earnings. All necessary discounting should be determined by
using a 6% discount rate. For transactions C and D, the time value of the hedging instrument is
excluded from hedge effectiveness and is to be separately accounted for.
Problem 10-2 (LO 3, 6) Hedge with forward contract a commitment and subsequent transaction. Kaiser Exporters buys used medical equipment and sells it to various
foreign health care institutions. On June 15, the company committed to sell medical equipment
to a foreign hospital for 800,000 FC. The equipment, with a cost of $325,000, was shipped to
the customer on August 15 with terms FOB shipping point and payment due on October 15.
At the time of the commitment, Kaiser acquired a forward contract to sell 800,000 FC in 120
days. Selected spot and forward rates are as follows:
Spot rate . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forward rate . . . . . . . . . . . . . . . . . . . . . . . .
June 15
June 30
August 15
September 30
$0.500
0.510
$0.485
0.490
$0.480
0.475
$0.470
0.468
The relevant discount rate is 6% and changes in the value of the firm commitment are measured as changes in the forward rate over time. Assume that the hedge is accounted for as a fair
value hedge and that the time value of the hedge is included in the assessment of effectiveness.
Required
Assuming that financial statements are prepared for the second and third quarters, identify
all relevant income statement and balance sheet accounts for the above transactions and determine the appropriate quarterly balances.
Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
07/15/2018 - RS0000000000000000000001059680 (Jackie Cohen) - Advanced Accounting
Chapter 10 FOREIGN CURRENCY TRANSACTIONS
593
Problem 10-3 (LO 3, 5) Income statement effects of transactions, commitments,
and hedging. Clayton Industries sells medical equipment worldwide. On March 1 of the
current year, the company sold equipment, with a cost of $160,000, to a foreign customer for
200,000 euros payable in 60 days. At the same time, the company purchased a forward contract
to sell 200,000 euros in 60 days. In another transaction, the company committed, on March
15, to deliver equipment in May to a foreign customer in exchange for 300,000 euros payable
in June. This equipment is anticipated to have a completed cost of $210,000. On March 15,
the company hedged the commitment by acquiring a forward contract to sell 300,000 euros in
90 days. Changes in the value of the commitment are based on changes in forward rates, and all
discounting is based on a 6% discount rate. Assume all hedges are accounted for as fair value
hedges and that the spot-forward difference is included in the assessment of hedge effectiveness.
Various spot and forward rates for the euro are as follows:
Forward Rate for 60
Days from March 1
Spot Rate
March 1. . . . . . . . . . . . . . . . . . . . . . . .
March 15 . . . . . . . . . . . . . . . . . . . . . .
March 31 . . . . . . . . . . . . . . . . . . . . . .
April 30 . . . . . . . . . . . . . . . . . . . . . . . .
$1.180
1.181
1.179
1.175
$1.181
1.180
1.178
Forward Rate for 90
Days from March 15
$1.179
1.177
1.174
For individual months of March and April, calculate the income statement effect of:
1.
2.
3.
4.
Required
The foreign currency transaction.
The hedge on the foreign currency transaction.
The foreign currency commitment.
The hedge on the foreign currency commitment.
Problem 10-4 (LO 3, 6) Hedging foreign currency transactions and commitments. Medical Distributors, Inc., is a U.S. company that buys and sells used medical equip-
ment throughout the United States and Canada. During the month of June, the company had
the following transactions with Canadian parties:
1. Purchased used equipment on June 1 from a hospital located in Toronto for 220,000 Canadian dollars (CA$) payable in 45 days. On the same day, the company paid $1,000 for a call
option to buy 220,000 Canadian dollars during July at a strike price of 1 CA$ ¼ $0.726.
The option had a fair value of $3,200 on June 30. The hedge was designated as a fair value
hedge.
2. Sold equipment on June 1 for 300,000 Canadian dollars to be paid in 30 days. At the same
time, the company purchased a forward contract to sell the Canadian dollars in 30 days and
the hedge was designated as a fair value hedge.
3. Committed to buy equipment on June 15 from a Montreal health care provider for 400,000
Canadian dollars in 45 days. At the same time, the company purchased a forward contract
to buy 400,000 Canadian dollars in 45 days.
4. Paid 30,000 Canadian dollars on June 20 to refurbish the equipment purchased on June 1.
5. Sold the equipment purchased on June 1 on June 20 for 310,000 Canadian dollars to be
received in 30 days.
6. Collected the 300,000 Canadian dollars on June 30 from the sale on June 1.
Selected spot and forward rates are as follows:
June 1 . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 15 . . . . . . . . . . . . . . . . . . . . . . . . . .
June 20 . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30 . . . . . . . . . . . . . . . . . . . . . . . . . .
Spot Rate
1 CA$
Forward Rate
1 CA$ ¼
$0.720
0.729
0.732
0.735
30-day sell rate ¼ $0.729
45-day buy rate ¼ $0.731
30-day buy rate ¼ $0.737
Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
07/15/2018 - RS0000000000000000000001059680 (Jackie Cohen) - Advanced Accounting
Part 2 MULTINATIONAL ACCOUNTING
594
Required
AND
OTHER REPORTING CONCERNS
Prepare all of the necessary journal entries to record the above activities during the month of
June. Changes in the value of the commitment are based on changes in forward rates. All necessary discounting should be determined using a 6% discount rate. The time value of all derivatives is included in the assessment of hedge effectiveness.
Problem 10-5 (LO 6) Cash flow hedges of a commitment, a forecasted transaction and a recognized liability. On March 1, a company committed to acquire 10,000
units of inventory to be delivered on May 31. The purchase price is to be paid in foreign currency (FC) in the amount of 200,000 FC. Assume that the commitment’s negative values are
$7,960 and $14,000 as of March 31 and May 31, respectively. Also assume that the inventory
will be processed further during the month of June at a cost of $12.50 per unit and will be sold
on July 10 to a customer for $90 per unit. On March 1, the company also forecasted the purchase of a piece of equipment to be delivered on May 31 with a cost of 200,000 FC. The equipment was placed into service at the beginning of July and has a useful life of 10 years and a
salvage value of $74,000. On March 1, the company borrowed 200,000 FC from a foreign
bank at an interest rate of 6.0% with interest and principal to be repaid on May 31.
Assume that on March 1 the company acquired three identical options to buy FC on May
31 with each option to be designated as a hedge for each of the three situations described above.
Information relating to each option is as follows:
For each option
Notional amount . . . . . . . . . . . . . . . . . . .
Strike price. . . . . . . . . . . . . . . . . . . . . . . .
Spot price . . . . . . . . . . . . . . . . . . . . . . . .
Value of option . . . . . . . . . . . . . . . . . . . .
Required
March 1
March 31
May 31
200,000
$
2.52
$
2.50
$ 1,300
200,000
$
2.52
$
2.54
$ 5,000
200,000
$
2.52
$
2.57
$ 10,000
For each of the three hedged situations, prepare a schedule to show the impact on earnings for
each of the first three calendar quarters of the year noting that all hedges are to be considered
cash flow hedges.
Problem 10-6 (LO 5, 6) The impact of no hedging versus hedging. In several
instances, Neibler Corporation has been engaged in transactions that were denominated or
settled in foreign currencies (FC). Given recent volatility in exchange rates between the U.S.
dollar and the FC, the company is considering using FC derivatives in a number of instances.
In order to communicate to management the impact of hedging, you have been asked to
develop a schedule relating to several hypothetical situations.
Hypothetical A involves the purchase of inventory in the amount of 100,000 FC with payment due in 60 days. Assume that the hedge would involve: (a) an option to buy 100,000 FC in
60 days and (b) a forward contract to buy 100,000 FC in 60 days. In both cases, the hedge is to
be considered a fair value hedge.
Hypothetical B involves the same facts as Hypothetical A except that the hedge is to be considered a cash flow hedge.
Hypothetical C involves a commitment to sell inventory in 90 days for 100,000 FC.
Assume that the hedge would involve: (a) an option to sell 100,000 FC in 90 days and (b) a forward contract to sell 100,000 FC in 90 days. In both cases, the hedge is to be considered a cash
flow hedge. In the case of the option, changes in the value of the commitment are to be measured by changes in spot rates over time, whereas in the case of the forward contract, changes in
the value of commitment are measured based on changes in forward rates. The inventory sold
has a cost of $100,000.
Hypothetical D involves a 90-day 100,000 FC note receivable bearing interest at 6%. Both
principal and interest are payable at maturity, and it is assumed that an option to sell 100,000
FC will be employed as a cash flow hedge.
Hypothetical E involves a forecasted sale of inventory in 90 days for 100,000 FC. Assume
that the inventory has a cost of $110,000 and a forward contract to sell 100,000 FC in 90 days
is the hedging instrument.
Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
07/15/2018 - RS0000000000000000000001059680 (Jackie Cohen) - Advanced Accounting
Chapter 10 FOREIGN CURRENCY TRANSACTIONS
595
Selected rate information is as follows:
At Inception
Derivatives to buy FC
Spot rate . . . . . . . . . . . . . . . . . . . . . . .
Forward rate . . . . . . . . . . . . . . . . . . . .
Strike price. . . . . . . . . . . . . . . . . . . . . .
Option value . . . . . . . . . . . . . . . . . . . .
Derivates to sell FC
Spot rate . . . . . . . . . . . . . . . . . . . . . . .
Forward rate . . . . . . . . . . . . . . . . . . . .
Strike price. . . . . . . . . . . . . . . . . . . . . .
Option value . . . . . . . . . . . . . . . . . . . .
$
$
$
$
1.50
1.52
1.51
800
After 60 days
After 90 days
$ 1.55
$ 1.55
$ 1.51
$4,000
$ 1.50
$ 1.48
$ 1.50
$1,000
$ 1.40
$ 1.40
$ 1.50
$10,000
In all hypotheticals, the time value of the derivative is to be excluded from the assessment of
effectiveness. For each of the above hypothetical situations, prepare a schedule to show the activity in balance sheet accounts and income statement accounts over the course of the events
assuming: (1) no hedging and (2) hedging. With respect to the balance sheet accounts, show the
balance in the derivative just prior to settlement and ignore an analysis of cash or foreign
currency balances.
Required
Problem 10-7 (LO 6) Hedging a forecasted transaction with a forward contract. In
the process of preparing a budget for the second quarter of the current fiscal year, Anderson
Welding, Inc., has forecasted foreign sales of 1,200,00 foreign currency (FC). The company is
concerned that the dollar will strengthen relative to the FC and has decided to hedge one-half
of the forecasted foreign sales with a forward contract to sell FC in 90 days. Assume that all
1,200,000 of the forecasted sales are shipped 60 days after acquiring the contract and that payment of the sales invoices occurs 30 days after shipment, with terms FOB shipping point.
Selected rate information is as shown below.
Days remaining on forward contract
90 days
60 days
30 days
0 days
Spot rate . . . . . . . . . . . . . . . . . . . . . . . . .
Forward rate . . . . . . . . . . . . . . . . . . . . . .
$1.900
1.890
$1.920
1.910
$1.880
1.900
$1.850
1.850
Assume that contract premiums or discounts are to be amortized over the term of the contract using the implicit interest rate of 0.1757% per 30-day period. This results in amortization
of $2,004, $2,000, and $1,996 for the three consecutive periods. All discounting is to be based
on a 6% interest rate.
1. Prepare all entries to record the forecasted sales and the related hedging activity. Assume that
financial statements are prepared every month and that entries should be made monthly.
2. Prepare a schedule to compare the impact on earnings of hedging half of the forecasted sales
versus not hedging the other half. Assume that the total cost of goods sold was $1,800,000,
evenly divided among the sales.
Required
Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
07/15/2018 - RS0000000000000000000001059680 (Jackie Cohen) - Advanced Accounting
Exercise 10-5
Gain (loss) on commitment through September 15 FCA
Gross profit margin without the hedge:
Gross profit margin with the hedge:
FCB
Problem 10-2
Balance Sheet Accounts Debit (Credit)
Income Statement Accounts Debit (Credit)
Use the rows below for your calculations
2nd Quarter
3rd Quarter
Problem 10-5
PROBLEM 10-5
For each option
March 1
Notional amount
Strike price
Spot rate
Value of option…
Intrinsic value
Time value
1st Quarter
Related to the commitment:
Gain (loss) on commitment
Gain (loss) on option transferred from OCI to offset
gain or loss on commitment
Gain (loss) in time value
Sales revenue
Cost of Sales:
Original cost
Adjustment for change in value of commitment
Additional processing costs
Total impact on earnings
Related to the purchase of equipment:
Gain (loss) in time value
Depreciation expense:
Total impact on earnings……………………………………………….
Related to the note payable:
Total impact on earnings……………………………………………….
March 31
May 31
2nd Quarter 3rd Quarter
Total
Purchase answer to see full
attachment