Exam 8: Foreign Currency Transactions and Hedging

Each of the following situations is independent of the others. Orion Industries is a U.S. company with a December 31 year-end, that regularly has transactions denominated in Canadian dollars. Use the following information on exchange rates (U.S.$/C$) to answer each question. Spot Rate Forward Rate for February 1, 2021 Delivery September 1, 2020 \ 0.774 \ 0.780 October 1, 2020 0.785 0.786 December 31, 2020 0.805 0.807 February 1, 2021 0.820 0.820 Required For each situation, make the journal entries necessary to record the events, including year-end adjustments. a. On October 1, 2020, Orion Industries takes delivery of merchandise from Ontario Suppliers. Orion pays Ontario Suppliers C$100,000 on February 1, 2021. This is an unhedged import transaction. b. On September 1, 2020, Orion Industries issues a purchase order to buy merchandise from Ontario Suppliers. Delivery will take place on October 1, 2020, and Orion will pay Ontario Suppliers C$100,000 on February 1, 2021. On September 1, 2018, Orion enters into a forward contract with XYZ Exchange for the purchase of C$100,000, to be delivered February 1, 2021. The forward is a hedge of a firm purchase commitment. Delivery and payment occur as planned. c. The CFO at Orion Industries believes that the U.S. dollar will strengthen with respect to the Canadian dollar. On October 1, 2020, she enters into a speculative forward sale contract with XYZ Exchange for delivery of C$100,000 on February 1, 2021. She closes the contract with an opposite position on December 31, 2020. d. On September 1, 2020, Orion Industries forecasts that it will buy merchandise from a Canadian supplier. Delivery and payment of C$100,000 is expected to take place on February 1, 2021. On September 1, 2020, Orion enters into a forward contract with XYZ Exchange for the purchase of C$100,000, to be delivered February 1, 2021. The forward is a hedge of a forecasted transaction. The merchandise purchase occurs as forecasted, and the merchandise is sold in March, 2021 for $115,000 in cash. Orion records cost of goods sold at the time of sale.

Use the following data to answer bellow Questions On October 25, 2020, a U.S. company sold merchandise on credit to a customer in Spain at an invoice price of €1,000, when the exchange rate was $1.25/€. On December 31, 2020, the U.S. company's year-end, the exchange rate was $1.257/€. On February 1, 2021, when the exchange rate was €1.23, the U.S. company received €1,000 in payment for the merchandise. -In 2020, the U.S. company reports sales revenue of

IFRS and U.S. GAAP for hedge accounting differ on which of the following points?

A U.S. company issues a purchase order on April 1 to buy merchandise from an Australian supplier for A$100,000, to be paid on August 1. To hedge the foreign exchange risk, on April 1 the U.S. company enters a forward purchase contract for A$100,000 with an August 1 delivery date. On May 1, the company takes delivery of the merchandise. On August 1 the company purchases the Australian dollars through the forward contract and pays the supplier. On August 15, the company sells the merchandise to a U.S. customer for $95,000 in cash. Assume the company records cost of goods sold when the sale is made. The company's fiscal year ends June 30. Relevant rates ($/A$) are as follows: Spot Rate Forward Rate for August 1 Delivery April 1 \ 0.776 \ 0.774 May 1 0.772 0.770 June 30 0.765 0.762 August 1 0.778 0.778 Required Make the journal entries to record the above events, including appropriate fiscal year-end adjusting entries.

A U.S. company plans to sell RM100,000 in merchandise to a Malaysian customer at the beginning of September 2020, with payment to be received in ringgits (RM). On June 1, 2020, it enters a forward contract, locking in the selling price of RM100,000 at $0.256/RM for delivery on September 1, 2020. The forward contract qualifies as a cash flow hedge of a forecasted transaction. On September 1, 2020, the company delivers RM100,000 in merchandise to the Malaysian customer, collects RM100,000 payment from the customer, and exchanges it for U.S. dollars using the forward contract. The company's accounting year ends June 30. Exchange rates ($/RM) are as follows: Spot Rate Forward Rate for September 1, 2020 Delivery June 1, 2020 \ 0.258 \ 0.256 June 30, 2020 0.254 0.253 September 1, 2020 0.252 0.252 Required Prepare the journal entries to record these events, including year-end adjusting entries.

A U.S. company reports a forward contract as a cash flow hedge of a forecasted purchase of merchandise, payment to be made in Hong Kong dollars. How is hedge accounting used in this situation?

Use the following information on the U.S. dollar value of the pound sterling to answer bellow Questions Spot Rate Forward Rate for August 16, 2020 Delivery May 16, 2020 \ 1.380 \ 1.375 June 30, 2020 1.390 1.388 August 16, 2020 1.400 1.400 On May 16, 2020, a U.S. company takes delivery of £100,000 in merchandise from a U.K. supplier. The company will pay the supplier £100,000 on August 16. On May 16, the company also enters a forward contract to buy £100,000 on August 16, 2020. On August 16, the company purchases £100,000 using the forward contract, and pays the supplier. The company's accounting year ends June 30, and it sells the merchandise in September 2020. -What is the net effect on fiscal 2020 income of exchange rate changes due to the purchase and the forward contract?

On November 1, 2020, a U.S. company invests in a forward sale contract for delivery of 1,000,000 Singapore dollars (S$) at $0.75/S$ on February 1, 2021. The spot rate on November 1 is $0.77/S$. At December 31, the end of the accounting year, the forward contract is still outstanding. The year-end spot rate is $0.73. The year-end forward rate for February 1 delivery of Singapore dollars is $0.735. How is the forward contract reported on the U.S. company's year-end balance sheet?

Use the following information to answer bellow Questions A U.S. company anticipates that it will purchase merchandise for €100,000 at the end of August and pay for it at the time the merchandise is delivered. On May 1, when the spot rate is $1.20 and the forward rate for delivery on August 30 is $1.21, the company enters a forward contract to buy €100,000 on August 30. The forward contract qualifies as a cash flow hedge of the forecasted purchase. The company purchases the merchandise on August 30, when the spot rate is $1.232, and closes the forward contract and pays the supplier €100,000. The company sells the merchandise in October. The company has a December 31 year-end. -As of August 30, the effect of the above events on other comprehensive income is:

An IFRS company in the U.K. hedges its forecasted purchase of equipment from a German supplier, using a forward contract to lock in the cost of the euros, in pounds, needed to pay for the equipment. The company incurs a gain on the forward. Which statement below is true?

A company holds put options for €1,000 with a strike price of $1.25/€, purchased for $20. The exchange rate declines to $1.22/€. The company

A U.S. company forecasts that it will receive A$1,000,000 in sales revenues from an Australian customer in 5 months. To lock in the dollar value of these revenues, on October 25, 2020, it enters a forward sale contract to deliver A$1,000,000 to a broker on March 25, 2021. The contract qualifies as a cash flow hedge of the forecasted sale. On March 25, 2021, the U.S. company receives A$1,000,000 in payment from the customer, records the revenue as earned, and sells the currency using the forward contract. The U.S. company's accounting year ends December 31. Relevant exchange rates ($/A$) are: Spot Rate Forward Rate for March 25, 2021 Delivery October 25, 2020 \ 0.777 \ 0.778 December 31, 2020 0.774 0.776 March 25, 2021 0.771 0.771 Required a. Calculate the following balances, reported on the U.S. company's books: i. Investment in forward, December 31, 2020 (indicate whether it is an asset or liability). ii. Sales revenue, 2021 b. Now assume the U.S. company closes the forward contract on February 1, 2021 when the forward rate for March 25 delivery is $0.773. What is sales revenue for 2021.

A U.S. company receives a sales order on December 10 from a Swiss company, for the sale of merchandise priced at CHF100,000, payment to be received on February 10. To hedge the foreign exchange risk, on December 10 the U.S. company enters a forward sale contract for CHF100,000 with a February 10 delivery date. On January 10, the company delivers the merchandise to the customer. On February 10, the company receives payment and sells the CHF100,000 using the forward sale contract. The company's accounting year ends December 31. Relevant rates ($/CHF) are as follows: Spot Rate Forward Rate for February 10 Delivery December 10 \ 1.065 \ 1.067 December 31 1.066 1.068 January 10 1.062 1.063 February 10 1.058 1.058 Required Make the journal entries to record the above events, including appropriate year-end adjusting entries.

A U.S. parent hedges its exposure to exchange rate changes caused by its investment in its subsidiary in Singapore. The subsidiary's functional currency is the U.S. dollar. Where are gains and losses on the hedge reported in the consolidated financial statements?

On November 16, 2019, a U.K. company, with a December 31 year-end, enters a forward purchase contract for €100,000 to be delivered on June 30, 2020. The contract hedges a forecasted purchase of equipment from a German supplier. The forward is closed and the equipment purchased on June 30, 2020. The equipment has a 5-year life, and is straight-line depreciated, no residual value. The company follows IFRS. Following is information on exchange rates (£/€): Spot Rate Forward Rate for June 30, 2020 Delivery November 16, 2019 £0.885 £0.881 December 31, 2019 0.889 0.890 June 30, 2020 0.895 0.895 Required Prepare the U.K. company's journal entries to record the following events: a. December 31, 2019 adjusting entry b. June 30, 2020 adjusting entries and transactions c. Equipment depreciation expense for 2020

A U.S. company uses forward contracts to hedge its euro-denominated purchases of merchandise imported from an Irish supplier. Assume the spot rate is $1.26/€ and the appropriate forward rate is $1.25 when the merchandise is delivered, and the company enters the forward contract. The spot rate is $1.23 when the forward contract comes due and the company pays the supplier. Which statement is true?

Use the following data to answer bellow Questions On May 20, when the exchange rate was $1.40/£, a U.S. company purchased merchandise from a U.K. supplier for £10,000 and paid for the merchandise on June 5, when the exchange rate was $1.38/£. On August 15, when the exchange rate was $1.23/€, the U.S. company sold the merchandise to a customer in Belgium at an invoice price of €16,000. On September 6, when the exchange rate was $1.21/€, the U.S. company received payment of €16,000 from the Belgian customer. The U.S. company's accounting year ends December 31. -What amount does the U.S. company report as cost of goods sold?

A U.S. company forecasts that it will receive £100,000 in sales revenue in 6 months. To lock in the dollar value of these revenues, on September 10, 2020, it enters a forward sale contract to deliver £100,000 to a broker at a rate of $1.325/£ on March 10, 2021. On March 10, 2021, the U.S. company receives £100,000 from customers, records the revenue as earned, and sells the currency using the forward contract. The U.S. company's accounting year ends December 31, and the forward qualifies as a cash flow hedge. Relevant exchange rates are: Spot Rate Forward Rate for March 10, 2021 Delivery September 10, 2020 \ 1.325 \ 1.324 December 31, 2020 1.327 1.326 March 10, 2021 1.321 1.321 Required Prepare the journal entries made by the U.S. company in 2019 and 2020, including any December 31, 2020 adjustments.

U.S. company has the following receivables and payables denominated in foreign currencies, prior to closing on December 31. Item Current \ balance Foreign currency balance December 31 spot rate 1. Receivable \ 125,840 100,000 euros \ 1.25 2. Receivable 372,500 500,000 Singapore dollars 0.75 3. Payable 1,378,000 1,000,000 pounds sterling 1.38 4. Payable 68,000 500,000 Hong Kong dollars 0.13 Required Prepare the adjusting entry the U.S. company makes at December 31 to update its receivables and payables. Show all calculations.

A U.S. company, with a December 31 year-end, enters into the following forward contracts on October 15, 2020: 1. Agreement to buy 100,000,000 yen (¥) on January 15, 2021 2. Agreement to sell 1,000,000 shekels (?) on February 18, 2021 Forward and spot rates for yen and shekels are as follows: Spot Rate for Yen Forward Rate for January 15, 2021 Delivery of Yen Spot Rate for Shekels Forward Rate for February 18, 2021 Delivery of Shekels October 15, 2020 \ 0.00940 \ 0.00942 \ 0.2879 \ 0.2884 December 31, 2020 0.00938 0.00939 0.2799 0.2880 Required a. How are the forward contracts valued on the company's December 31, 2020 balance sheet? For each contract, specify the amount and whether it is a current asset or a current liability. b. Assume that the forward contract to buy yen is a hedge of a ¥100,000,000 forecasted purchase from suppliers in Japan. Make the adjusting entry for this contract at December 31, 2020. c. Assume the forward contract to sell shekels is a hedge of a ?1,000,000 loan receivable currently on the company's books. Make the adjusting entry for this contract at December 31, 2020.