Part I
Introduction:
Forward Exchange Contract: A forward exchange contract shows exchange rates for selected major international currencies for one month, three months, and six months forward contracts. An active dealer market is available for companies willing to transact in foreign currencies. The forward rate on a date is not the same as the spot rate. The difference between spot and the forward rate is known as the spread. The spread gives information about the strength or weakness of currencies.
The entries to record the purchase of equipment, assuming forward contract is not designed as a hedge, but is entered into manage the company’s foreign currency exposure and also determine effect of these transactions on financial statements.
Part I
Answer to Problem 11.10E
Net effect on income $700
Explanation of Solution
a. entries
Date | Particular | Debit $ | Credit $ |
12/16/20X7 | Equipment | 95,200 | |
Accounts payable | 95,200 | ||
(Purchase of equipment payable in Swiss franc) | |||
Foreign currency receivable from broker | 93,800 | ||
Dollars payable to exchange broker | 93,800 | ||
(Signed a forward exchange contract for 60 days) | |||
12/31/X7 | Foreign currency transaction loss | 2,800 | |
Accounts payable | 2,800 | ||
(Exchange transaction loss recognized on revaluation of payable) | |||
Foreign currency receivable form broker | 3,500 | ||
Foreign currency transaction gain | 3,500 | ||
(Foreign currency gain on revaluation recognized on December 31) | |||
02/14/20X8 | Foreign currency transaction loss | 700 | |
Foreign currency receivable from broker | 700 | ||
(Loss on revaluation of February recognized) | |||
Accounts payable | 1,400 | ||
Foreign currency transaction gain | 1,400 | ||
(Revaluation of foreign currency accounts payable) | |||
Dollars payable to exchange broker | 93,800 | ||
Cash | 93,800 | ||
(Paid U.S dollars to exchange broker for forward contract) | |||
Foreign currency units | 96,600 | ||
Foreign currency receivable from exchange broker | 96,600 | ||
(Received francs from exchange broke recognized in U.S. dollar) | |||
Accounts payable | 96,600 | ||
Foreign currency units | 96,600 | ||
(Settlement of foreign currency payable) |
- Exchange of equipment value at purchase
- Foreign currency receivable from broker
- Revaluation of accounts payable to current U.S. dollars:
- Revaluation of foreign currency receivable:
- Revaluation of foreign currency receivable to current equivalent U.S. dollar:
- Revaluation of foreign currency accounts payable to current U.S. dollars:
- Receipt of Francs from exchange broker
$98,000 | |
($95,200) | |
$2,800 |
$97,300 | |
($93,800) | |
$3,500 |
$96,600 | |
($97,300) | |
$700 |
$96,600 | |
($98,000) | |
$1,400 |
b. Effect on income statement
$ | |
Foreign currency exchange loss (with Swiss co) | (2,800) |
Foreign currency exchange gain ( with broker) | 3,500 |
Net effect on income | 700 |
c. Overall effect of transaction
$ | |
Foreign exchange gain 20X7 | 700 |
Foreign exchange loss on receivable 20X8 | (700) |
Foreign exchange transaction gain on payable 20X8 | 1,400 |
Overall effect | 1,400 |
Part II
Introduction:
Forward Exchange Contract: A forward exchange contract shows exchange rates for selected major international currencies for one month, three months, and six months forward contracts. An active dealer market is available for companies willing to transact in foreign currencies. The forward rate on a date is not the same as the spot rate. The difference between spot and the forward rate is known as the spread. The spread gives information about the strength or weakness of currencies.
The entries assuming the forward contract is designed as a cash flow hedge for variability of future cash flows from the foreign currency accounts payable.
Part II
Explanation of Solution
Date | Particular | Debit $ | Credit $ |
12/16/20X7 | Equipment | 95,200 | |
Accounts payable | 95,200 | ||
(Purchase of equipment payable in Swiss franc) | |||
Foreign currency receivable from broker | 93,800 | ||
Dollars payable to exchange broker | 93,800 | ||
(Signed a forward exchange contract for 60 days) | |||
12/31/X7 | Foreign currency transaction loss | 2,800 | |
Accounts payable | 2,800 | ||
(Exchange transaction loss recognized on revaluation of payable) | |||
Foreign currency receivable form broker | 3,500 | ||
Other comprehensive income | 3,500 | ||
(Foreign currency gain on revaluation recognized on December 31) | |||
Other comprehensive income | 2,800 | ||
Foreign currency transaction gain | 2,800 | ||
(Offset of foreign currency transaction loss on revaluation) | |||
02/14/20X8 | Other comprehensive income | 700 | |
Foreign currency receivable from broker | 700 | ||
(Loss on revaluation of February recognized) | |||
Accounts payable | 1,400 | ||
Foreign currency transaction gain | 1,400 | ||
(Revaluation of foreign currency accounts payable) | |||
Foreign currency transaction loss | 1,400 | ||
Other comprehensive income | 1,400 | ||
(Offset of foreign currency transaction gain) | |||
Dollars payable to exchange broker | 93,800 | ||
Cash | 93,800 | ||
(Paid U.S dollars to exchange broker for forward contract) | |||
Foreign currency units | 96,600 | ||
Foreign currency receivable from Exchange broker | 96,600 | ||
(Received francs from exchange broke recognized in U.S. dollar) | |||
Accounts payable | 96,600 | ||
Foreign currency units | 96,600 | ||
(Settlement of foreign currency payable) |
- Exchange of equipment value at purchase
- Foreign currency receivable from broker
- Revaluation of accounts payable to current U.S. dollars:
- Revaluation of foreign currency receivable:
- Revaluation of foreign currency receivable to current equivalent U.S. dollar:
- Revaluation of foreign currency accounts payable to current U.S. dollars:
- Receipt of Francs from exchange broker
$98,000 | |
($95,200) | |
$2,800 |
$97,300 | |
($93,800) | |
$3,500 |
$96,600 | |
($97,300) | |
$700 |
$96,600 | |
($98,000) | |
$1,400 |
Want to see more full solutions like this?
Chapter 11 Solutions
ADVANCED FINANCIAL ACCOUNTING-ACCESS
- (a) ABC Co has a year end of 31 December 20X1 and uses the dollar ($) as its functional currency. On 25 October 20X1 ABC Co buys goods from a Swedish supplier for Swedish Krona (SWK) 286,000. Rates of exchange: 25 October 20X1 $1 = SWK 11.16 16 November 20X1 $1 = SWK 10.87 31 December 20X1 $1 = SWK 11.02 Required: Show the accounting treatment for the above transactions if: (a) A payment of SWK286,000 is made on 16 November 20X1. (b) The amount owed remains outstanding at the year-end date.arrow_forwardOn December 12, 20X5, Dahl Company entered into three forward exchange contracts, each to purchase 100,000 francs in 90 days. The relevant exchange rates are as follows: Spot Rate Forward Rate for March 12, 20X6 December 12, 20X5 $ 0.88 $ 0.90 December 31, 20X5 0.98 0.93 3. Dahl entered into the first forward contract to manage the foreign currency risk from a purchase of inventory in November 20X5, payable in March 20X6. The forward contract is not designated as a hedge. At December 31, 20X5, what amount of foreign currency transaction gain should Dahl include in income from this forward contract? multiple choice $10,000 $0 $5,000 $3,000 4. Dahl entered into the second forward contract to hedge a commitment to purchase equipment being manufactured to Dahl’s specifications. At December 31, 20X5, what amount of foreign currency transaction gain should Dahl include in income from this forward contract? multiple choice $10,000 $0 $5,000…arrow_forwardAlpha Company, whose journal entry is in the dollar, purchased goods with an invoiced value of FC250,000 on 1 November 20x1 to be settled on 31 January 20x2. Alpha Company’s financial year end is 31 December. Exchange rates 1 November 20x1 1FC:$1.5 31 December 20x1 1FC:$1.45 31 January 20x2 1FC:$1.48 Prepare the journal entry for Alpha Company: (a)1 November 20x1-Purchase of goods: (b)31 December 20x1- Year-end adjustment for outstanding accounts payable: (c)31 January 20x2 – Settlement of accounts payable:arrow_forward
- D Company purchases 80,000 US dollars under a forward contract dated November 1, 2020, for delivery on January 31, 2021. The following are the direct exchange rates of a US dollar: 11/01/2020 12/31/2020 01/31/2021 Spot rates 45.75 44.90 44.5030-day forward 44.30 46.15 43.2060-day forward 47.65 44.30 45.7590-day forward 45.25 45.45 44.10 If the forward contract is a hedge of an import transaction of $80,000 dated November 1, 2020, payable on January 31, 2021, how much forex gain should the company report on its December 31, 2020 statement of comprehensive income?arrow_forwardOn December 1, Y1, AAA, a US based company, entered into a three months forward contract to purchase 1 million foreign currency FC, on March 1, Y2. The following US per FC exchange rates apply: Date Spot Rate Forward Rate December 1, Y1 $0.088 $0.084 December 31, Y1 $ 0.080 $0.074 March 1, Y2 $0.076 AAA borrowing rate is 12%. The present value factor for 2 months at an annual rate is 0.9803. How would AAA report the forward contract on its balance sheet on December 31, Y1? Justify your answer and show your calculations. 3 pts As a liability of 9,803. 1,000,000 x (0.084-0.074) = 10,000 x 0.9803 = 9803arrow_forwardQuestion 1: During December 2019 of the current year, Wiley Systems, Inc., a company based in Seattle, Washington, entered into the following transactions: Dec. 12: Purchased computer chips from a Taiwan company. Contract was denominated in 125,000 Taiwan dollars. Direct exchange rate on this date was $.0391. Inventory received 12/12/2019 and 125,000 Taiwan dollars paid on 1/10/2020 Assume that on December 31 the direct exchange rates was Taiwan dollar $.0351. Assume that the direct exchange rate on the settlement date was Taiwan dollar $.0398. a) Prepare the journal entry for purchase on the books of Wiley Systems, Inc. b) Prepare journal entry necessary to adjust the account as of December 31 c) Prepare journal entry to record settlement of account on January 10. Prepare journal entry to record settlement of account on January 10.arrow_forward
- On December 1, 2022, GAZA Company purchased Equipment from Ispanya by 100,000 Euro payable on March 31, 2023. At the same time GAZA entered into a 120-day forward contract with :ALQUDS Bank to purchase 100,000 Euro in March 31, 2023 to hedge risk of changes in exchange rates. GAZA's fiscal year ends on December 31. The direct exchange rates follow Date Spot Rate Forward Rate December 1, 20X1 December 31, 20X1 0.600 0.610 0.609 0.612 March 31, 20X2 0.602 Required: Prepare all journal entries for GAZAarrow_forwardOn 11/1/2020, an American firm purchased an inventory costing 100,000 Canadian Dollars from a Canadian firm to be paid for on 2/1/2020. Also on 11/1/2020, the American firm entered into a forward contract to purchase 100,000 Canadian dollars for delivery on 2/1/2020. The exchange rates were as follows: Spot Forward 11/1/2020 1 CD = $0.73 1 CD = $0.74 12/31/2020 1 CD = $0.75 1 CD = $0.76 2/1/2021 1 CD = $0.79 1 CD = $0.79 The American firm's fiscal year-end is 12/31. The changes in the value of the forward contract should be discounted at 12%. 1. What is the beginning balance (as of 1/1/2021) of accounts payable to the Canadian firm? a. 79,000 b. 75,000 c. 0 d. 73,000 2. What is the balance on the settlement date (2/1/2021) of inventory purchased from the Canadian firm? a. 73,000 b. 75,000 c. 0 d. 79,000 3. How much…arrow_forwardOn December 1, Year 1, Triaxal Incorporation enters into a forward contract to sell one million Philippines pesos (PP) to its bank in exchange for Canadian dollars on March 1, Year 2, at the market rate for a 90-day forward contract of PP1=$0.0227. On December 31, Year 1, Triaxal’s year-end, the 60-day forward rate to sell Philippines pesos on March 1 is quoted at PP1=$0.0222. On March 1, Year 2, the currencies are exchanged when the spot rate is PP1=$0.0220. Required Prepare journal entries for speculative forward contract under Gross Method and Net Method.arrow_forward
- The following data applies to Anie Company’s purchase of 60,000 Belgium francs under a forward contract datedNovember 30, 2021, for delivery on March 1, 2022:11/30/2021 12/31/2021 03/01/2022Spot rates 55.75 53.90 54.5030-day forward rate 51.30 56.15 53.2060-day forward rate 57.65 52.30 55.7590-day forward rate 54.25 55.45 52.10Anie Company entered into the forward contract to speculate in the foreign currency. In its Income Statement for the yearended December 31, 2021, what amount of loss should the company report from this forward contract?arrow_forwardMAKATI Exports Corp sold metal crafts to a US firm for $70,000 and pertinent information on exchange conversion rates related to this trasnaction were as follows: Conversion Rate (Peso to US) Nov 04 Receipt of order P27.40 Nov 22 Date of shipment 27.50 Dec 31 Balance sheet date 27.60 Jan 06 Date of collection 27.00 The sale would be appropriately recorded at A. 1,890,000 B. 1,925,000 C. 1,918,000 D. 1,925,000arrow_forwardOn December 12, 2022, Tin Company entered into a forward exchange contract to purchase 500,000 euros in 90 days.The relevant exchange rates are as follows: Spot rate Forward rate (for 3/12/2023)November 30, 2022 P0.56 P0.57December 12, 2022 P0.57 P0.58December 31, 2022 P0.61 P0.60March 12, 2023 P0.62 P0.62 The purpose of this forward contract is to hedge a purchase of inventory in November 30, 2022, payable in March 2023. How much is the net forex gain/loss December 31, 2022? (just encode the absolute amount)arrow_forward