Advanced Accounting
12th Edition
ISBN: 9781305084858
Author: Paul M. Fischer, William J. Tayler, Rita H. Cheng
Publisher: Cengage Learning
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Question
Chapter 10, Problem 10.2P
To determine
Forward Contract: Forward contract is the contract entered by two private parties to buy/sell a given commodity, foreign currency at a specified rate.
Fair Value Hedge: Fair value hedge accounting is accounting for hedges based on changes in fair value of assets or liabilities.
To identify: The accounts and balances in income statements and balance sheet on quarter closing dates.
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Monument Company (a U.S.-based company) ordered a machine costing €150,000 from a foreign supplier on January 15, when the spot rate was $1.19 per €. A one-month forward contract was signed on that date to purchase €150,000 at a forward rate of $1.21. The forward contract is properly designated as a fair value hedge of the €150,000 firm commitment. On February 15, when the company receives the machine, the spot rate is $1.20. At what amount should Monument Company capitalize the machine on its books?
Multiple Choice
$29,000
$181,500
$178,500
$180,000
On June 30 of the current year, Ester Company entered into a firm commitment to purchase equipment from Nagasaki Company for 80,000,000 yen on August 31. The exchange rate on June 30 is 100 yen = $1. To reduce the exchange rate risk that could increase the cost of the equipment in US dollars, the entity paid $12,000 for a call option contract. The contract gave the entity the option to purchase 80,000,000 yen at an exchange rate of 100 yen = $1 on August 31. On August 31, the exchange rate is 93 yen = $1. What amount in US dollars did the entity save by purchasing the call option?
A. 12,000 C. 60,215
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Kaiser Exporters buys used medical equipment and sells it to variousforeign health care institutions. On June 15, the company committed to sell medical equipmentto a foreign hospital for 800,000 FC. The equipment, with a cost of $325,000, was shipped tothe customer on August 15 with terms FOB shipping point and payment due on October 15.At the time of the commitment, Kaiser acquired a forward contract to sell 800,000 FC in 120days. Selected spot and forward rates are as follows:June 15 /June 30/ August 15/ September 30Spot rate . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.500/ $0.485/ $0.480/ $0.470Forward rate . . . . . . . . . . . . . . . . . . . . . . . . 0.510 /0.490/ 0.475/ 0.468The relevant discount rate is 6% and changes in the value of the firm commitment are measured as changes in the forward rate over time. Assume that the hedge is accounted for as a fairvalue hedge and that the time value of the hedge is included in the assessment of effectiveness.Assuming that…
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