Exam 8: Foreign Currency Transactions and Hedges

On December 1, 20X5, Gillard Ltd. sold goods to International Traders Ltd., a company located in Switzerland, for 500,000 Swiss francs (CHF). At the date of sale, the spot rate was CHF1 = $1.0329. On the same date, Gillard acquired a 90-day forward contract at a rate of CHF1 = $1.0315. On March 1, 20X6, Gillard received full payment from International Traders and delivered the Swiss francs in execution of the forward contract. The spot rate at March 1, 20X6, was CHF1 = $1.0287. Assume that Gillard has a December 31 year-end and that the spot rate on that date was CHF1 = $1.0302. At December 31, the forward rate for a 60-day contract was CHF1 = 1.0394. -At December 31, what is the balance of Gillard's forward contract payable?

On December 1, 20X5, Gillard Ltd. sold goods to International Traders Ltd., a company located in Switzerland, for 500,000 Swiss francs (CHF). At the date of sale, the spot rate was CHF1 = $1.0329. On the same date, Gillard acquired a 90-day forward contract at a rate of CHF1 = $1.0315. On March 1, 20X6, Gillard received full payment from International Traders and delivered the Swiss francs in execution of the forward contract. The spot rate at March 1, 20X6, was CHF1 = $1.0287. Assume that Gillard has a December 31 year-end and that the spot rate on that date was CHF1 = $1.0302. At December 31, the forward rate for a 60-day contract was CHF1 = 1.0394. - At December 31, what is the balance of Gillard's accounts receivable?

HCB, a Canadian public company, entered into the following transactions late in 20X6: • Transaction #1: On October 15, HCB purchased inventory from a Mexican supplier for 800,000 pesos (Ps). On the same day, HCB entered into a forward contract for Ps 800,000 at the 60-day forward rate of Ps1 = $0.399. The company has designated this as a fair-value hedge. The Mexican supplier was paid in full on December 15, 20X6. • Transaction #2: On November 1, HCB contracted to sell inventory to a customer in Switzerland at a selling price of CHF 400,000. The contract called for the merchandise to be delivered to the customer on December 1, with payment to be received in Swiss francs by January 31, 20X7. On November 1, HBC arranged a forward contract to deliver CHF 400,000 on January 31, 20X7, at a rate of CHF1 = $1.20. The company has designated this as a fair value hedge on a firm commitment. • On December 1, 20X6, the forward rate on the Swiss francs to January 31, 20X7, was CHF1 = $1.21. • The company has a December 31, 20X6, year-end. On this date the forward rate for the Swiss franc was CHF1 = $1.23. HBC has a year-end of December 31. Spot rates were as follows during this period of time: October 15, 20X6 Ps1 =\ 0.396 SF1 =\ 1.19 November 1,20X6 Ps1 =\ 0.391 SF1 =\ 1.17 December 1,20X6 Ps1 =\ 0.389 SF1 =\ 1.20 December 15,20\times6 1=\ 0.388 1=\ 1.19 December 31,20\times6 1=\ 0.381 1=\ 1.21 January 31,20\times7 1=\ 0.376 1=\ 1.19 - Required: The company uses the net method to record hedging transactions. Prepare the journal entries that HCB should make to record the events described above.

What does the holder of a put option on foreign currency have the right to do?

Compare and contrast accounting for foreign currency transactions and hedge accounting under IFRS and ASPE.

On March 1, 20X2, McBride Ltd. issued a purchase order to Tao Heavy Machines (Singapore)Inc. to acquire a drilling machine for $400,000 SGD. On the same day, McBride entered into a forward contract to receive $400,000 SGD on July 31, 20X2. The machine was delivered on June 1, 20X2, and payment was made July 31, 20X2. McBride has an April 30 year-end. The following information has been provided: Date Spot Rate Forward rate to July 31,20\times2 March 1,20\times2 .7686 .7810 April 30,20\times2 .7702 .7818 June 1,20\times2 .7940 .7985 July 31,20\times2 .7995 n/a -Assume that the transaction qualifies as a cash-flow hedge. What is the cost of the hedge?

Beauty Care Limited (BCL)manufactures and distributes leather furniture to various companies in Europe. On April 2, 20X6, BCL entered into a sales contract with a company in Germany to sell 1,000 sofas. The contract price is €2,000 per sofa. Five hundred sofas are to be delivered in May 15, 20X6, and the remaining half is to be delivered on December 20, 20X6. Payment is due in two instalments, with half due on August 31, 20X6, and the remaining half due January 30, 20X7. However, the customer has the right to cancel the contract with 30 days' notice. BCL entered into a forward contract to hedge against the euro exchange rate for €1 million, each coming due on January 30, 20X7. BCL has an October 31 year-end. Delivery of the furniture occurred on the dates specified and the company collected the receivables due and settled the forward contract January 30, 20X7. The exchange rates were as follows: Forward rate to January 30, Canadian equivalent of euro Spot rate 20\times7 April 2,20\times6 1.50 1.54 June 30,20\times6 1.51 1.57 August 31,20\times6 1.53 1.58 October 31,20\times6 1.55 1.56 December 20,20\times6 1.59 1.61 January 30,20\times7 1.63 settled - Required: Assume that the forward contract is designated as a cash flow hedge, since the sale is highly probable. Prepare the journal entries to record the sales and the hedge. Use the net method to record the journal entries. BCL reports under IFRS.

Under IFRS, which of the following statements is true?

On December 1, 20X5, Gillard Ltd. sold goods to International Traders Ltd., a company located in Switzerland, for 500,000 Swiss francs (CHF). At the date of sale, the spot rate was CHF1 = $1.0329. On the same date, Gillard acquired a 90-day forward contract at a rate of CHF1 = $1.0315. On March 1, 20X6, Gillard received full payment from International Traders and delivered the Swiss francs in execution of the forward contract. The spot rate at March 1, 20X6, was CHF1 = $1.0287. -What amount should Gillard record for the sale?

Which of the following is not one of the conditions that must be met to qualify for hedge accounting?

On March 1, 20X2, McBride Ltd. issued a purchase order to Tao Heavy Machines (Singapore)Inc. to acquire a drilling machine for $400,000 SGD. On the same day, McBride entered into a forward contract to receive $400,000 SGD on July 31, 20X2. The machine was delivered on June 1, 20X2, and payment was made July 31, 20X2. McBride has an April 30 year-end. The following information has been provided: Date Spot Rate Forward rate to July 31,20\times2 March 1,20\times2 .7686 .7810 April 30,20\times2 .7702 .7818 June 1,20\times2 .7940 .7985 July 31,20\times2 .7995 n/a -Assume that the transaction qualifies as a cash-flow hedge. What is the carrying value of the machine?

A business plans to acquire a forward contract to hedge a monetary liability. Which of the following statements about the forward contract is true?

On November 2, 20X9, Henry Company purchased a machine for 100,000 Swiss francs (CHF)with payment required on March 30, 20X10. To eliminate the risk of foreign exchange losses on this payable, Henry entered into a forward exchange contract on November 3, 20X9, to receive CHF 100,000 at a forward rate of CHF1 = $2 on March 30, 20X10. The spot rate was CHF1 = $1.95 on November 2, 20X9, and CHF1 = $1.97 on December 1, 20X9. - How should the premium or discount on the forward exchange contract be accounted for?

On June 1, 20X4, Chua (Canada)Co. entered into a 90-day forward contract to sell $500,000 Singapore dollars (SGD)to its bank on August 29, 20X4. The following information has been provided: June 1, 90-day forward rate SGD$1 = $0.7750 July 1, 60-day forward rate SGD$1 = $0.7630 August 29, spot rate SGD$1 = $0.748 - Chua has a June 30 year-end. What is the exchange gain (loss)at June 30, 20X4?

Which of the following is not a major reason for fluctuating exchange rates?

Part 1: Helvetia Corp., a Swiss firm, bought merchandise from Bouchard Company of Quebec on December 15, 20X7, for 20,000 CHF, payable on January 14, 20X8. Bouchard and Helvetia both close their books on December 31. The 20,000 CHF was paid on January 14, 20X8. The exchange rates for CHF1 were: December 15,20\times7 spot C\ .9740 December 15,20\times730 -day forward C\ .9800 December 31,20\times7 C\ .9700 December 31,20\times7 14-day forward C\ .9730 January 14,20\times8 C\ .9720 Required: Provide the journal entries for Helvetia (the buyer)at each of the above dates, as required. Part 2: Helvetia also had the following balances on its SFP at December 31, 30X7: • Inventory purchased from a Canadian company for $50,000 on December 15, 20X7, for cash • 1,000 shares of B C Inc., purchased on December 15, 20X7, for $40 per share. On December 31, 20X7, the B. C. Inc. shares were trading at $42 per share. These shares are classified at FVTPL. • Helvetia purchased an investment property in Canada on December 15, 20X7, for $5.5 million. On December 31, 20X7, this property was valued at $5.6 million. Helvetia uses the fair-value method to report its investment properties. For each of the above assets, explain the value that would be recognized on its SFP as at its year-end of December 31, 20X7, and any related amounts reported on the SCI.

Under accounting standards for private enterprises, what exchange rate is used for non-monetary items carried at fair value?

HCB, a Canadian public company, entered into the following transactions late in 20X6: • Transaction #1: On October 15, HCB purchased inventory from a Mexican supplier for 800,000 pesos (Ps). On the same day, HCB entered into a forward contract for Ps 800,000 at the 60-day forward rate of Ps1 = $0.399. The company has designated this as a fair-value hedge. The Mexican supplier was paid in full on December 15, 20X6. • Transaction #2: On November 1, HCB contracted to sell inventory to a customer in Switzerland at a selling price of CHF 400,000. The contract called for the merchandise to be delivered to the customer on December 1, with payment to be received in Swiss francs by January 31, 20X7. On November 1, HBC arranged a forward contract to deliver CHF 400,000 on January 31, 20X7, at a rate of CHF1 = $1.20. The company has designated this as a fair value hedge on a firm commitment. • On December 1, 20X6, the forward rate on the Swiss francs to January 31, 20X7, was CHF1 = $1.21. • The company has a December 31, 20X6, year-end. On this date the forward rate for the Swiss franc was CHF1 = $1.23. HBC has a year-end of December 31. Spot rates were as follows during this period of time: October 15, 20X6 Ps1 =\ 0.396 SF1 =\ 1.19 November 1,20X6 Ps1 =\ 0.391 SF1 =\ 1.17 December 1,20X6 Ps1 =\ 0.389 SF1 =\ 1.20 December 15,20\times6 1=\ 0.388 1=\ 1.19 December 31,20\times6 1=\ 0.381 1=\ 1.21 January 31,20\times7 1=\ 0.376 1=\ 1.19 - Required: The company uses the gross method to record hedging transactions. Prepare the journal entries that HCB should make to record the events described above.

On March 1, 20X2, McBride Ltd. issued a purchase order to Tao Heavy Machines (Singapore)Inc. to acquire a drilling machine for $400,000 SGD. On the same day, McBride entered into a forward contract to receive $400,000 SGD on July 31, 20X2. The machine was delivered on June 1, 20X2, and payment was made July 31, 20X2. McBride has an April 30 year-end. The following information has been provided: Date Spot Rate Forward rate to July 31,20\times2 March 1,20\times2 .7686 .7810 April 30,20\times2 .7702 .7818 June 1,20\times2 .7940 .7985 July 31,20\times2 .7995 n/a - Assume that the transaction qualifies as a fair-value hedge. What amount of exchange gain (loss)should be recognized at April 30, 20X2?

Under accounting standards for private enterprises, which of the following can be used as hedging instruments?