Exam 8: Foreign Currency Transactions and Hedging

A U.S. company forecasts that it will sell €100,000 in merchandise to an Italian customer in mid-February 2021, and will collect payment, in euros, on delivery. On November 1, 2020, it enters a forward contract, locking in the selling price of €100,000 at $1.232/€ for delivery on February 15, 2021. The forward qualifies as a cash flow hedge of a forecasted transaction. On January 10, 2021, the company closes the forward contract. On February 15, 2021, the company sells €100,000 of merchandise to the Italian customer, receives immediate payment in euros, and exchanges euros for U.S. dollars on the spot market. Information on $/€ exchange rates follows: Spot Rate Forward Rate for February 15, 2021 Delivery November 1, 2020 \ 1.230 \ 1.232 December 31, 2020 1.233 1.234 January 10, 2021 1.247 1.248 February 15, 2021 1.256 1.256 Required Prepare the journal entries to record these events, including any adjusting entries at the company's December 31 year-end.

Use the following information to answer bellow Questions A U.S. company anticipates that it will sell merchandise for €100,000 at the end of August and receive payment for it at the end of October. On May 1, when the spot rate is $1.20 and the forward rate for delivery on October 31 is $1.21, the company enters a forward contract to sell €100,000 on October 31. The forward contract qualifies as a cash flow hedge of the forecasted sale. The company sells the merchandise on August 30, when the spot rate is $1.232 and the forward rate for October 31 delivery is $1.23 and receives payment of €100,000 and closes the forward contract on October 31, when the spot rate is $1.24. The company has a December 31 year-end. -Sales revenue is reported on the company's income statement in the amount of:

A U.S. company borrows HK$1,000,000 from a Hong Kong bank on November 1, 2019, when the spot rate is $0.127/HK$. The loan carries an interest rate of 3%, and principal and interest are due on April 1, 2020, in Hong Kong dollars. The spot rate on December 31, the company's year-end, is $0.128/HK$. On April 1, the company pays principal and interest to close the loan. The spot rate on April 1 is $0.124/HK$. The average spot rate for the period November 1 - April 1 is $0.1272/HK$. Required Prepare all necessary journal entries to record the above events on the U.S. company's books, including year-end adjusting entries.

A company holds put options for €1,000 with a strike price of $1.25/€, purchased for $20. The exchange rate increases to $1.28/€. The company

On November 2, 2019, when the spot rate is $0.12/HK$, a company takes delivery of merchandise priced at HK$1,000,000 from a supplier in Hong Kong. The spot rate is $0.125 on December 31, the company's year-end. Payment of HK$1,000,000 is made to the supplier on February 1, 2020, when the spot rate is $0.122. What is the effect of exchange gains and losses on 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 loss D) No effect \ 2,000 exchange gain

Use the following information to answer bellow Questions A U.S. company anticipates that it will sell merchandise for €100,000 at the end of August and receive payment for it at the end of October. On May 1, when the spot rate is $1.20 and the forward rate for delivery on October 31 is $1.21, the company enters a forward contract to sell €100,000 on October 31. The forward contract qualifies as a cash flow hedge of the forecasted sale. The company sells the merchandise on August 30, when the spot rate is $1.232 and the forward rate for October 31 delivery is $1.23 and receives payment of €100,000 and closes the forward contract on October 31, when the spot rate is $1.24. The company has a December 31 year-end. -What is the net exchange gain/loss for the year related to this transaction?

A U.S. company enters a forward contract on October 31, 2020 to hedge a forecasted sale of merchandise to a Canadian customer for C$100,000 on March 31, 2021. On March 31 it delivers the merchandise to the customer, receives payment of C$100,000, and uses the forward contract to exchange C$ for U.S. dollars. The company's accounting year ends December 31. Exchange rates ($/C$) are as follows: Spot Rate Forward Rate for March 31, 2021 Delivery October 31, 2020 \ 0.772 \ 0.770 December 31, 2020 0.769 0.766 March 31, 2021 0.760 0.760 Required a. Prepare the journal entries necessary to record the above events, including year-end adjustments, if the forward qualifies as a cash flow hedge of the forecasted sale. b. Prepare the journal entries necessary to record the above events, including year-end adjustments, if the forward does not qualify for hedge accounting.

On November 30, 2019, a U.S. company, with a December 31 year-end, enters a forward purchase contract for €100,000 to be delivered on March 20, 2020, when the forward rate for March 20 delivery is $1.23/€. The forward contract does not qualify as a hedge. At year-end, the forward rate for delivery on March 30 is $1.21/€. The company closes the contract at its expiration date, when the spot rate is $1.24/€. At what amount are gains and losses reported in income on the forward in 2019 and 2020? $\quad$$\quad$ A) \ 0 \ 1,000 gain B) \ 0 \ 1,000 loss C) \ 2,000 gain \ 3,000 loss D) \ 2,000 loss \ 3,000 gain

Which one of the following is an example of hedge accounting for a U.S. company?

Use the following information on the U.S. dollar value of the euro to answer bellow Questions Spot Rate Forward Rate for Ap ril 30, 2021 Delivery October 30, 2020 \ 1.250 \ 1.254 December 31, 2020 1.258 1.256 April 30, 2021 1.260 1.260 On October 30, 2020, a U.S. company forecasts that it will purchase merchandise from an Italian supplier at the end of April 2021, in the amount of €100,000, and will pay the supplier on delivery. On October 30, the company enters a forward contract to buy €100,000 on April 30, 2021 and classifies it as a cash flow hedge of the forecasted purchase. On April 30, 2021, the company receives the merchandise, closes the forward contract and pays the supplier. The company's accounting year ends December 31. -On December 31, 2020, how is the change in value of the forward contract reported?

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

How are accounts receivable, denominated in another currency, reported on a U.S. company's balance sheet?

On July 10, a U.S. company with a December 31 year-end enters a forward contract that locks in the purchase price of won, for delivery on August 15. The forward contract hedges a firm commitment to buy merchandise from a supplier in Korea, with payment denominated in won. The purchase is made on August 1, and payment is made on August 15. The U.S. company sells the merchandise in September. Where is the value of the firm commitment to purchase reported in the year-end financial statements?

A U.S. company plans to buy ¥100,000 in merchandise from an Chinese supplier at the beginning of March 2020, payment to be made in yuan (¥). On November 1, 2019, it enters a forward contract, locking in the purchase price of ¥100,000 at $0.158/¥ for delivery on March 1, 2020. The forward contract qualifies as a cash flow hedge of a forecasted transaction. On March 1, 2020, the company takes delivery of ¥100,000 in merchandise from the Chinese supplier and pays for it by exchanging U.S. dollars for yuan using the forward contract. The company sells the merchandise later in 2020. Its accounting year ends December 31. Exchange rates ($/¥) are as follows: Spot Rate Forward Rate for March 1, 2020 Delivery November 1, 2019 \ 0.154 \ 0.158 December 31, 2019 0.162 0.164 March 1, 2020 0.168 0.168 Required Prepare the journal entries to record these events, including year-end adjusting entries and the cost of sales entry when the merchandise is sold.

On November 30, 2019, a U.K. company, with a December 31 year-end, enters a forward purchase contract for €100,000 to be delivered for £0.75/€ on April 20, 2020. The contract hedges a forecasted purchase of equipment. At year-end, the forward rate for delivery on April 20 is £0.77/€. The forward is closed, and the equipment purchased on April 20, when the spot rate is £0.78/€. The company follows IFRS. Assuming no residual value, total depreciation expense over the life of the equipment is:

Interest expense on a loan denominated in another currency is converted at:

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. -The U.S. company's exchange gain or loss for 2020 is

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. -On August 30, the company records the merchandise at what amount?

A U.S. company sells to customers in Canada and buys from suppliers in Singapore. At December 31, 2019, the company's year-end, the following items are reported on its balance sheet: Accounts receivable (C$2,500,000)..…………………… $2,125,000 Accounts payable(S$1,400,000)………………………….. 1,061,200 On January 22, 2020, when the spot rate is $0.845/C$, the company collects C$1,000,000 from customers. It collects the remaining C$1,500,000 on February 16, 2020, when the spot rate is $0.856. On February 23, 2020, when the spot rate is $0.762, the company pays suppliers S$800,000. On March 6, 2020, when the spot rate is $0.768, the company pays suppliers the remaining S$600,000. Required Calculate the exchange gain or loss for 2020. Show calculations clearly.

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. -At what amount will the company report cost of goods sold for the sale of the merchandise in fiscal 2021?