Exam 8: Foreign Currency Transactions and Hedging

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 merchandise is sold by the U.S. company, cost of goods sold is:

A U.S. company buys from suppliers in Germany and pays the suppliers in euros. The company's accounting year ends June 30. On March 1, the company sends a purchase order to a German supplier 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 closes the forward contract, takes delivery of the merchandise, and pays the supplier. The company sells the merchandise to its U.S. customers for $200,000 in cash on August 31. 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 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. -When the merchandise is sold by the company, what is the cost of goods sold?

Use the following information on the U.S. dollar value of the euro to answer bellow Questions Spot Rate Forward Rate for March 16, 2020 Delivery November 16, 2019 \ 1.250 \ 1.248 December 31, 2019 1.260 1.255 March 16, 2020 1.265 1.265 On November 16, 2019, a U.S. company makes a sale to a customer in Germany. Under the sale terms, the customer will pay the company €100,000 on March 16. On November 16, the company also enters a forward contract to sell €100,000 on March 16, 2020. On March 16, the company receives €100,000 from the customer and sells it using the forward contract. The company's accounting year ends December 31. -What is the net effect on 2020 income of exchange rate changes due to the sale and the forward contract?

Use the following information on the U.S. dollar value of the euro to answer bellow Questions Spot Rate Forward Rate for March 16, 2020 Delivery November 16, 2019 \ 1.250 \ 1.248 December 31, 2019 1.260 1.255 March 16, 2020 1.265 1.265 On November 16, 2019, a U.S. company makes a sale to a customer in Germany. Under the sale terms, the customer will pay the company €100,000 on March 16. On November 16, the company also enters a forward contract to sell €100,000 on March 16, 2020. On March 16, the company receives €100,000 from the customer and sells it using the forward contract. The company's accounting year ends December 31. -How will the company report the forward contract on its December 31, 2019 balance sheet?

Hedge accounting is not used for hedges of remeasured subsidiaries because:

A U.S. company acquired a subsidiary in Denmark several years ago. The subsidiary's functional currency is the krone (kr). Following is financial information for the subsidiary for 2021: January 1,2021 net assets kr250,000 Reported net income 10,000 Dividends 2,000 $\text { Exchange rates }\{\$ / \mathrm{kr}\} \text { are as follows: }$ Spot Rate Forwa rd Rate for December 31,2021 Delivery January 1, 2021 \ 0.165 \ 0.167 2021 average 0.162 / Rate when dividends declared 0.160 / December 31, 2021 0.158 0.158 Required a. Assume the U.S. company hedges its net investment in the subsidiary by entering a forward contract on January 1, 2021, for December 31, 2021 delivery of kr100,000. i. Is this hedge a forward purchase or a forward sale? Explain. ii. Calculate the gain or loss on exposure to the subsidiary, and the loss or gain on the forward contract. iii. What is the net amount of translation gains or losses, reported in consolidated other comprehensive income for 2021? b. Assume the U.S. company hedges its net investment in the subsidiary with krone denominated debt in the amount of kr200,000, held throughout 2021. i. Calculate the gain or loss on the debt. ii. What is the net amount of translation gains or losses, reported in consolidated other comprehensive income for 2021?

McDonald's Corporation hedges its investments in international subsidiaries. All subsidiaries have a positive position in net assets. The hedge gains and losses are reported in other comprehensive income. For the subsidiaries located in euro countries, which statement is true?

A U.S. company has payables denominated in euros that it hedges with foreign currency forward purchase contracts. The U.S. dollar strengthens against the euro. Which statement is true?

A U.S. company has a forward sale contract for delivery of euros at the end of May at a price of $1.24/€. The U.S. dollar strengthens against the euro during this period. The company will: