Exam 12: Accounting for Foreign Currency Transactions and Hedging Foreign Exchange Risk

Kettle Company purchased equipment for 375,000 British pounds from a supplier in London on July 3, 2017. Payment in British pounds is due on Sept. 3, 2017. The exchange rates to purchase one pound is as follows: On its August 31, 2017, income statement, what amount should Kettle report as a foreign exchange transaction gain:

On November 1, 2016, Jagged Company sold inventory to a company in England. The sale was for 600,000 British pounds and payment will be received on February 1, 2017. On November 1, Jagged entered into a forward contract to sell 600,000 British pounds on February 1 at the forward rate of $1.65. Spot rates for the British pound are as follows: Jagged has a December 31 fiscal year-end. Required: Compute each of the following: 1. The dollars to be received on February 1, 2017, from selling the 600,000 pounds to the exchange dealer. 2. The dollars that would have been received from the account receivable if Jagged had not hedged the sale contract with the forward contract. 3. The discount or premium on the forward contract. 4. The transaction gain or loss on the exposed asset related to the sale in 2016 and 2017. 5. The transaction gain or loss on the forward contract in 2016 and 2017. 6. The amount of the discount or premium on the forward contract amortized in 2016 and 2017.

A transaction gain or loss on a forward contract entered into as a hedge of an identifiable foreign currency commitment may be:

On April 1, 2017, Manatee Company entered into two forward exchange contracts to purchase 300,000 euros each in 90 days. The relevant exchange rates are as follows: The second forward contract was strictly for speculation. On April 30, 2017, what amount of foreign currency transaction gain should Manatee report in income.

A discount or premium on a forward contract is deferred and included in the measurement of the related foreign currency transaction if the contract is classified as a:

Accounting for a foreign currency transaction involves the terms measured and denominated. Describe a foreign currency transaction and distinguish between the terms measured and denominated.

A transaction gain or loss is reported currently in the determination of income if the purpose of the forward contract is to:

On October 1, 2016, Philly Company purchased inventory from a foreign customer for 750,000 units of foreign currency (FCU) due on January 31, 2017. Simultaneously, Philly entered into a forward contract for 750,000 units of FC for delivery on January 31, 2017, at the forward rate of $0.75. Payment was made to the foreign customer on January 31, 2017. Spot rates on October 1, December 31, and January 31, were $0.72, $0.73, and $0.76, respectively. Philly amortizes all premiums and discounts on forward contracts and closes its books on December 31. Required: A. Prepare all journal entries relative to the above to be made by Philly on October 1, 2016. B. Prepare all journal entries relative to the above to be made by Philly on December 31, 2016. C. Compute the transaction gain or loss on the forward contract that would be recorded in 2017. Indicate clearly whether the amount is a gain or loss.

On December 1, 2016, Dorn Corporation agreed to purchase a machine to be manufactured by a company in Brazil. The purchase price is 1,150,000 Brazilian reals. To hedge against fluctuations in the exchange rate, Dorn entered into a forward contract on December 1 to buy 1,150,000 reals on April 1, the agreed date of machine delivery, for $0.375 per real. The following exchange rates were quoted: Required: Prepare journal entries necessary for Dorn during 2016 and 2017 to account for the transactions described above.

There are a number of business situations in which a firm may acquire a forward exchange contract. Identify three common situations in which a forward exchange contract can be used as a hedge.

Imperial Corp., a U.S. corporation, entered into a contract on November 1, 2016, to sell two machines to Crown Company, for 95,000 foreign currency units (FCU). The machines were to be delivered and the amount collected on March 1, 2017. In order to hedge its commitment, Imperial entered into a forward contract for 95,000 FCU delivery on March 1, 2017. The forward contract met all conditions for hedging an identifiable foreign currency commitment. Selected exchange rates for FCU at various dates were as follows: Required: Prepare all journal entries relative to the above on the books of Imperial Corp. on the following dates: 1. November 1, 2016. 2. Year-end adjustments on December 31, 2016. 3. March 1, 2017. (Include all adjustments related to the forward contract.)

A transaction gain or loss at the settlement date is:

With respect to disclosure requirements for fair value measurements, which of the following is NOT one of the three levels in the hierarchy of classifying fair value measurements?

On October 1, 2016, Kill Company shipped equipment to a foreign customer for a foreign currency (FC) price of FC 3,000,000 due on January 31, 2017. All revenue realization criteria were satisfied and accordingly the sale was recorded by Kill Company on October 1. Simultaneously, Kill entered into a forward contract to sell 3,000,000 FCU on January 31, 2017 for $1,200,000. Payment was received from the foreign customer on January 31, 2017. Spot rates on October 1, December 31, and January 31 were $0.42, $0.425, and $0.435, respectively. Kill amortizes all premiums and discounts on forward contracts and closes its books on December 31. Required: Prepare all journal entries relative to the above to be made by Kill during 2016 and 2017.

The forward exchange rate quoted for the remaining term of a forward contract is used to account for the contract when the forward contract: