Exam 8: Foreign Currency Transactions and Hedging

A U.S. company sells merchandise to customers in Germany and receives payment in euros. The company's accounting year ends June 30. On March 1, the company receives an order from a German customer for €100,000 in merchandise, payable in euros on delivery, delivery to take place August 15. On the same day the company enters into a forward contract for delivery of €100,000 on August 15. The forward qualifies as a fair value hedge of a firm commitment. On August 15, the company delivers the merchandise, receives payment of €100,000 from the customer, closes the forward contract and receives U.S. dollars. Information on $/€ exchange rates is as follows: Spot Rate Forward Rate for August 15 Delivery March 1 \ 1.235 \ 1.233 June 30 1.232 1.231 August 15 1.228 1.228 Required Make the journal entries to record the above events, including appropriate year-end adjusting entries.

Use the following information on the U.S. dollar value of the euro to answer bellow Questions Spot Rate Forward Rate for April 30, 2021 Delivery October 30,2020 \1 .230 \ 1.240 November 1, 2020 1.248 1.254 December 31,2020 1.260 1.265 April 30, 2021 1.270 1.720 On October 30, 2020, a U.S. company receives a purchase order from a customer in Spain. Under the sale terms, the customer will pay the company €100,000 on April 30. On October 30, the U.S. company also enters a forward contract to sell €100,000 on April 30, 2021. The company delivers the merchandise to the customer on November 1. On April 30, the company receives €100,000 from the customer and sells it using the forward contract. The company's accounting year ends December 31. -What net gain or loss is recognized in 2020, in addition to sales revenue?

A U.S. company enters a forward purchase contract for speculative purposes. When are gains and losses on the hedge investment reported in income?

A U.S. company sells merchandise to customers in Hong Kong. The merchandise is priced in Hong Kong dollars, and customers generally take 15 days to pay for the merchandise. The U.S. company's sales revenue for these sales, reported on its income statement, is expressed in U.S. dollars converted at:

Use the following information to answer bellow Questions A U.S. company purchases a 90-day certificate of deposit from a Singapore bank on May 15, when the spot rate is $0.72/S$. The certificate has a face value of S$100,000 and pays interest at an annual rate of 2 percent. On August 13, the certificate of deposit matures, and the company receives principal and interest of S$100,500 and records interest revenue on the investment. The spot rate on August 13 is $0.75/S$. The average spot rate for the period May 15 - August 13 is $0.73/S$. The company's accounting year ends December 31. -Interest income on the investment is reported at:

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. -At what amount is cost of goods sold reported when the company sells the merchandise in October?

On November 1, 2019, a U.S. company sells merchandise at a price of £100,000 to a U.K. customer, with payment, in pounds sterling, to be received on March 1, 2020. On November 1, the company enters a forward contract for delivery of £100,000 on March 1, 2020. On March 1, 2020, the company receives the £100,000, and uses the forward contract to exchange the pounds for dollars. The U.S. company has a December 31 year-end. Spot and forward rates ($/£) are as follows: Spot Rate Forward Rate for March 1, 2020 Delivery November 1, 2019 \ 1.385 \ 1.381 December 31, 2019 1.362 1.358 March 1, 2020 1.318 1.318 Required Fill in the amounts below, appearing on the U.S. company's financial statements. a. Investment in forward contract, December 31, 2019 balance sheet. Indicate whether it is an asset or a liability. b. Gain or loss on forward contract, 2020 income statement. Indicate whether it is a gain or loss. c. Gain or loss on accounts receivable, 2020 income statement. Indicate whether it is a gain or loss.

On November 2, 2019, when the spot rate is $0.12/HK$, a company sells merchandise priced at HK$1,000,000 to a customer in Hong Kong. The spot rate is $0.125 on December 31, the company's year-end. Payment of HK$1,000,000 is received from the customer on February 1, 2020, when the spot rate is $0.122. What exchange gains and losses are reported in 2019 and 2020 income? $\quad$$\quad$ A) \ 5,000 exchange loss \ 3,000 exchange gain B) \ 5,000 exchange gain \ 3,000 exchange loss C) No effect \ 2,000 exchange gain D) No effect \ 2,000 exchange loss

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. -How much in U.S. dollars does the U.S. company pay for the £100,000 on August 16, 2020?

On November 1, 2019, a U.S. company thinks the euro will strengthen against the U.S. dollar, so it enters into a forward contract in the amount of €1,000,000, for delivery on March 15, 2020. This is a speculative contract. The company's accounting year ends December 31. The company closes the contract on February 1, 2020. Exchange rates are as follows ($/€): Spot Rate Forward Rate for March 15, 2020 Delivery Noyember 1, 2019 \ 1.22 \ 1.23 December 31, 2019 1.26 1.25 February 1, 2020 1.27 1.28 Required a. Does the company enter a forward purchase or a forward sale contract? Explain. b. Prepare the journal entries necessary on December 31, 2019 and February 1, 2020 to record the above events.

A U.S. company buys merchandise on a regular basis from U.K. suppliers, with payment to be made in pounds. On March 20, 2020, the company takes delivery of merchandise costing £100,000 from a U.K. supplier, with payment to be made on July 20, 2020. On March 20, the company enters a forward contract for delivery of £100,000 on July 20. On July 20, the company closes the contract and pays the supplier. The company has a June 30 year-end. Spot and forward rates ($/£) are as follows: Spot Rate Forward Rate for July 20, 2020 Delivery March 20, 2020 \ 1.322 \ 1.330 June 30, 2020 1.346 1.344 July 20, 2020 1.339 1.339 Required Fill in the amounts below, appearing on the U.S. company's financial statements. a. Investment in forward contract, June 30, 2020 balance sheet. Indicate whether it is an asset or a liability. b. Gain or loss on forward contract, fiscal 2021 income statement. Indicate whether it is a gain or loss. c. Gain or loss on accounts payable, fiscal 2021 income statement. Indicate whether it is a gain or loss.

A U.S. company buys inventory from a supplier in Canada and pays for the inventory in Canadian dollars (C$). The inventory is converted to U.S. dollars on the U.S. company's balance sheet using what $/C$ exchange rate?

To achieve matching of hedge gains and losses against losses and gains on the hedged item, accounting for qualified hedges of firm purchase commitments denominated in foreign currency:

A U.S. company takes delivery of merchandise costing £100,000 on October 19, 2020. The company pays for the merchandise, in pounds sterling, on February 19, 2021. It sells the merchandise later in 2021. The U.S. company has a December 31 year-end. Spot rates ($/£) are as follows: Spot Rate Oct ober 19, 2020 \ 1.385 December 31, 2020 1.387 February 19, 2021 1.400 Required Calculate the following amounts appearing in the U.S. company's financial statements. a. Exchange gain or loss, 2020 income statement b. Exchange gain or loss, 2021 income statement c. Cost of goods sold, 2021 d. Accounts payable, December 31, 2020 balance sheet

A U.S. company borrows €100,000 by issuing bonds to German investors when the spot rate is $1.25/€. The interest rate is 3 percent per annum. Which of the following is false concerning the U.S. company's accounting for this loan?

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. -The U.S. company reports sales revenue in the amount of:

IFRS requires which reporting practice, not allowed under U.S. GAAP?

On October 1, 2020, a U.S. company expects to purchase merchandise from a Singapore supplier for around S$100,000, at the end of March, payment to be made on delivery. To hedge the expected purchase, on October 1, 2020, the company enters a forward contract that locks in the purchase price of S$100,000 for delivery on March 31, 2021. The company takes delivery of the merchandise on March 31, 2021, the company closes the forward and immediately pays the supplier. The forward contract qualifies as a cash flow hedge of the forecasted transaction. The company has a December 31 year-end. Forward and spot prices for Singapore dollars ($/S$) are as follows: Spot Rate Forward Rate for March 31, 2021 Delivery October 1, 2020 \ 0.754 \ 0.756 December 31, 2020 0.775 0.776 March 31, 2021 0.772 0.772 Required: a. Prepare the journal entries to record the above events, including year-end adjustments. b. The company sells the inventory on June 1, 2021. Prepare the journal entry to record the cost of goods sold. c. Repeat requirements a. and b., assuming the forward contract does not qualify for hedge accounting.

A U.S. company has suppliers in Singapore, who require payment in Singapore dollars. Which investment hedges the exchange risk associated with these suppliers?

Use the following information on the U.S. dollar value of the New Zealand dollar to answer bellow Questions Spot Rate Forward Rate for June 30, 2020 Delivery March 28, 2020 \ 0.725 \ 0.730 May 2, 2020 0.732 0.735 June 28, 2020 0.750 0.750 On March 28, 2020, a U.S. company issues a purchase order to buy merchandise for NZ$100,000. The company will pay the supplier on June 28, 2020, so on March 28, the company enters a forward contract to purchase NZ$100,000 on June 28. The company takes delivery of the merchandise on May 2, 2020. On June 28, 2020, the company acquires NZ$100,000 using the forward contract and pays the supplier. The company sells the merchandise later in the year. The company's accounting year ends December 31. -When the company takes delivery of the merchandise on May 2, 2020, accounts payable is credited in the amount of: