On November 1, 2017, Dos Santos Company forecasts the purchase of raw materials from a Brazilian supplier on February 1, 2018, at a price of 200,000 Brazilian reals. On November 1, 2017, Dos Santos pays $1,500 for a three-month call option on 200,000 reals with a strike price of $0.40 per real. Dos Santos properly designates the option as a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2017, the option has a fair value of $1,100. The following spot exchange rates apply: Date U.S. Dollar per Brazilian real November 1, 2017 $0.40 December 31, 2017 0.38 February 1, 2018 0.41 What is the net impact on Dos Santos Company’s 2017 net income as a result of this hedge of a forecasted foreign currency transaction? Choose the correct.a. $–0–.b. $400 decrease in net income.c. $1,000 decrease in net income.d. $1,400 decrease in net income.

On November 1, 2017, Dos Santos Company forecasts the purchase of raw materials from a Brazilian supplier on February 1, 2018, at a price of 200,000 Brazilian reals. On November 1, 2017, Dos Santos pays $1,500 for a three-month call option on 200,000 reals with a strike price of $0.40 per real. Dos Santos properly designates the option as a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2017, the option has a fair value of $1,100. The following spot exchange rates apply: Date U.S. Dollar per Brazilian real November 1, 2017 $0.40 December 31, 2017 0.38 February 1, 2018 0.41 What is the net impact on Dos Santos Company’s 2017 net income as a result of this hedge of a forecasted foreign currency transaction? Choose the correct.a. $–0–.b. $400 decrease in net income.c. $1,000 decrease in net income.d. $1,400 decrease in net income.

Financial Accounting Intro Concepts Meth/Uses

14th Edition

ISBN:9781285595047

Author:Weil

Publisher:Weil

Chapter13: Marketable Securities And Derivatives

Section: Chapter Questions

Problem 22E

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On November 1, 2017, Dos Santos Company forecasts the purchase of raw materials from a Brazilian supplier on February 1, 2018, at a price of 200,000 Brazilian reals. On November 1, 2017, Dos Santos pays $1,500 for a three-month call option on 200,000 reals with a strike price of $0.40 per real. Dos Santos properly designates the option as a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2017, the option has a fair value of $1,100. The following spot exchange rates apply: Date U.S. Dollar per Brazilian real November 1, 2017 $0.40 December 31, 2017 0.38 February 1, 2018 0.41 What is the net impact on Dos Santos Company’s 2018 net income as a result of this hedge of a forecasted foreign currency transaction? Assume that the raw materials are consumed and become a part of the cost of goods sold in 2018. Choose the correct.a. $80,000 decrease in net income.b. $80,600 decrease in net income.c. $81,100 decrease in net income.d. $83,100 decrease in…
Use the following information for Problems 21 and 22.On November 1, 2017, Dos Santos Company forecasts the purchase of raw materials from a Brazilian supplier on February 1, 2018, at a price of 200,000 Brazilian reals. On November 1, 2017, Dos Santos pays $1,500 for a three-month call option on 200,000 reals with a strike price of $0.40 per real. Dos Santos properly designates the option as a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2017, the option has a fair value of $1,100. The following spot exchange rates apply:What is the net impact on Dos Santos Company’s 2018 net income as a result of this hedge of a forecasted foreign currency transaction? Assume that the raw materials are consumed and become a part of the cost of goods sold in 2018.a. $80,000 decrease in net income.b. $80,600 decrease in net income.c. $81,100 decrease in net income.d. $83,100 decrease in net income.
Based on past experience, Maas Corp. (a U.S.-based company) expects to purchase raw materials from a foreign supplier at a cost of 1,200,000 francs on March 15, 2021. To hedge this forecasted transaction, on December 15, 2020, the company acquires a call option to purchase 1,200,000 francs in three months. Maas selects a strike price of $0.68 per franc when the spot rate is $0.68 and pays a premium of $0.005 per franc. The spot rate increases to $0.686 at December 31, 2020, causing the fair value of the option to increase to $10,000. By March 15, 2021, when the raw materials are purchased, the spot rate has climbed to $0.70, resulting in a fair value for the option of $24,000. The raw materials are used in assembling finished products, which are sold by December 31, 2021, when Maas prepares its annual financial statements. Prepare all journal entries for the option hedge of a forecasted transaction and for the purchase of raw materials. What is the overall impact on net income over…
Based on past experience, Maas Corp. (a U.S.-based company) expects to purchase raw materials from a foreign supplier at a cost of 2,000,000 francs on March 15, 2021. To hedge this forecasted transaction, on December 15, 2020, the company acquires a call option to purchase 2,000,000 francs in three months. Maas selects a strike price of $0.79 per franc when the spot rate is $0.79 and pays a premium of $0.003 per franc. The spot rate increases to $0.794 at December 31, 2020, causing the fair value of the option to increase to $13,000. By March 15, 2021, when the raw materials are purchased, the spot rate has climbed to $0.81, resulting in a fair value for the option of $40,000. The raw materials are used in assembling finished products, which are sold by December 31, 2021, when Maas prepares its annual financial statements. Prepare all journal entries for the option hedge of a forecasted transaction and for the purchase of raw materials.
Torres Corporation (a U.S.-based company) expects to order goods from a foreign supplier at a price of 100,000 pounds, with delivery and payment to be made on September 20. On July 20, Torres purchased a two-month call option on 100,000 pounds and designated this option as a cash flow hedge of a forecasted foreign currency transaction. The option has a strike price of $1.25 per pound and costs $600. The spot rate for pounds is $1.25 on June 20 and $1.30 on September 20. What amount will Torres Corporation report as an option expense in net income for the quarter ended September 30?a. $300b. $600c. $2,000d. $5,000
Shandra Corporation (a U.S.-based company) expects to order goods from a foreign supplier at a price of 121,000 pounds, with delivery and payment to be made on April 20. On February 20, when the spot rate is $1.41 per pound, Shandra purchases a two-month call option on 121,000 pounds and designates this option as a cash flow hedge of a forecasted foreign currency transaction. The time value of the option is excluded in assessing hedge effectiveness; the change in time value is recognized in net income over the life of the option. The option has a strike price of $1.41 per pound and costs $1,210. The goods are received and paid for on April 20. Shandra sells the imported goods in the local market by May 31. The spot rate for pounds is $1.46 on April 20. What amount will Shandra Corporation report as foreign exchange gain or loss in net income for the quarter ended June 30?
Maloney Corporation has decided to speculate on the foreign exchange market, and has entered into a 6-month forward contract to sell 250,000 Mexican pesos. When the forward contract was acquired on October 1, 2012, the spot rate for the peso was $0.1601 and the 6-month future was $0.1639. On December 31, 2012, the spot rate was $0.1616 and the future rate was $0.1607. On April 1, 2013, the spot rate was $0.1650. Spot Rate Forward Rate 10/1/12 0.1601 0.1639 12/31/12 0.1616 0.1607 4/1/13 0.1650 Prepare the necessary journal entries to record the forward contract Journal…
On November 1, 2020, Cheng Company (a U.S.-based company) forecasts the purchase of goods from a foreign supplier for 100,000 yuan. Cheng expects to receive the goods on April 30, 2021, and make immediate payment. On November 1, 2020, Cheng enters into a six-month forward contract to buy 100,000 yuan. The company properly designates the forward contract as a cash flow hedge of a forecasted foreign currency transaction. Forward points are excluded in assessing hedge effectiveness and are amortized to net income using a straight-line method on a monthly basis over the life of the contract. The following U.S. dollar–Yuan exchange rates apply: Date Spot Rate Forward Rate(to April 30, 2021) November 1, 2020 $ 0.21 $ 0.195 December 31, 2020 0.19 0.170 April 30, 2021 0.18 N/A As expected, Cheng receives goods from the foreign supplier on April 30, 2021, and pays 100,000 yuan immediately. Cheng sells the imported goods in the local market in May 2021.…
On June 1, 2017, Micro Corp. received an order for parts from a Mexican customer at a price of 1,000,000 Mexican pesos with a delivery date of July 31, 2017. On June 1, when the U.S. dollar–Mexican peso spot rate is $0.115, Micro Corp. entered into a two month forward contract to sell 1,000,000 pesos at a forward rate of $0.12 per peso. Micro designates the forward contract as a fair value hedge of the firm commitment to receive pesos, and the fair value of the firm commitment is measured by referring to changes in the peso forward rate. Micro delivers the parts and receives payment on July 31, 2017, when the peso spot rate is $0.118. On June 30, 2017, the Mexican peso spot rate is $0.123, and the forward contract has a fair value of $2,400. What is the net impact on Micro’s net income for the quarter ended June 30, 2017, as a result of this forward contract hedge of a firm commitment?a. $–0–.b. $2,400 increase in net income.c. $4,000 decrease in net income.d. $8,000 increase in net…
On June 1, 2017, Micro Corp. received an order for parts from a Mexican customer at a price of 1,000,000 Mexican pesos with a delivery date of July 31, 2017. On June 1, when the U.S. dollar–Mexican peso spot rate is $0.115, Micro Corp. entered into a two month forward contract to sell 1,000,000 pesos at a forward rate of $0.12 per peso. Micro designates the forward contract as a fair value hedge of the firm commitment to receive pesos, and the fair value of the firm commitment is measured by referring to changes in the peso forward rate. Micro delivers the parts and receives payment on July 31, 2017, when the peso spot rate is $0.118. On June 30, 2017, the Mexican peso spot rate is $0.123, and the forward contract has a fair value of $2,400.What is the net impact on Micro’s net income for the quarter ended September 30, 2017, as a result of this forward contract hedge of a firm commitment? Choose the correct.a. $–0–.b. $115,000 increase in net income.c. $118,000 increase in net…
On June 1, 2017, Micro Corp. received an order for parts from a Mexican customer at a price of 1,000,000 Mexican pesos with a delivery date of July 31, 2017. On June 1, when the U.S. dollar–Mexican peso spot rate is $0.115, Micro Corp. entered into a two month forward contract to sell 1,000,000 pesos at a forward rate of $0.12 per peso. Micro designates the forward contract as a fair value hedge of the firm commitment to receive pesos, and the fair value of the firm commitment is measured by referring to changes in the peso forward rate. Micro delivers the parts and receives payment on July 31, 2017, when the peso spot rate is $0.118. On June 30, 2017, the Mexican peso spot rate is $0.123, and the forward contract has a fair value of $2,400.What is Micro’s net increase or decrease in cash flow from having entered into this forward contract hedge? Choose the correct.a. $–0–.b. $1,000 increase in cash flow.c. $1,500 decrease in cash flow.d. $2,000 increase in cash flow.
On November 1, 2020, Cheng Company (a U.S.-based company) forecasts the purchase of goods from a foreign supplier for 130,000 yuan. Cheng expects to receive the goods on April 30, 2021, and make immediate payment. On November 1, 2020, Cheng enters into a six-month forward contract to buy 130,000 yuan. The company properly designates the forward contract as a cash flow hedge of a forecasted foreign currency transaction. Forward points are excluded in assessing hedge effectiveness and are amortized to net income using a straight-line method on a monthly basis over the life of the contract. The following U.S. dollar–Yuan exchange rates apply: Date Spot Rate Forward Rate (to April 30, 2021) November 1, 2020 $ 0.24 $ 0.225 December 31, 2020 0.23 0.200 April 30, 2021 0.21 N/A As expected, Cheng receives goods from the foreign supplier on April 30, 2021, and pays 130,000 yuan immediately. Cheng sells the imported goods in the local market in May 2021. Prepare all journal entries, including…