a.
Foreign exchange rate: The rate at which currency of one country is changed to currency of another country is called foreign exchange rate. Mainly there are two rate, i.e., direct exchange rate and indirect exchange rate.
Foreign exchange gain or loss: Foreign exchange gain or loss arises when there is selling or buying of any goods and services in foreign currency.
Forward contract: It is the contract between the purchase and the seller where they agreed to buy or sell an asset at a fixed price in the future on a specific date.
The recording of the
b.
Foreign exchange rate: The rate at which currency of one country is changed to currency of another country is called foreign exchange rate. Mainly there are two rate, i.e., direct exchange rate and indirect exchange rate.
Foreign exchange gain or loss: Foreign exchange gain or loss arises when there is selling or buying of any goods and services in foreign currency.
Forward contract: It is the contract between the purchase and the seller where they agreed to buy or sell an asset at a fixed price in the future on a specific date.
The effect on net income of A company if forward contract is made or if forward contract is not made.
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Advanced Financial Accounting
- On August 1, Ling-Harvey Corporation (a U.S.-based importer) placed an order to purchase merchandise from a foreign supplier at a price of 400,000 ringgits. Ling-Harvey will receive and make payment for the merchandise in three months on October 31. On August 1, Ling-Harvey entered into a forward contract to purchase 400,000 ringgits in three months at a forward rate of $0.60. It properly designates the forward contract as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured by referring to changes in the forward rate. Relevant exchange rates for the ringgit are as follows:Ling-Harvey’s incremental borrowing rate is 12 percent. The present value factor for one month at an annual interest rate of 12 percent (1 percent per month) is 0.9901. Ling-Harvey must close its books and prepare its third-quarter financial statements on September 30.a. Prepare journal entries for the forward contract and firm commitment through October 31.b.…arrow_forwardOn August 1, Pure Joy Corporation (a U.S.-based importer) placed an order to purchase merchandise from a foreign supplier at a price of 400,000 pounds. Pure Joy will receive and make payment for the merchandise in three months on October 31. On August 1, Pure Joy entered into a forward contract to purchase 400,000 pounds in three months at a forward rate of $0.60 per pound. The company properly designates the forward contract as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured by referring to changes in the forward rate, and, therefore, forward points are included in assessing hedge effectiveness. Relevant U.S. dollar exchange rates for the pound are as follows: Date Spot Rate Forward Rate(to October 31) August 1 0.60 0.60 September 30 0.63 0.66 October 31 0.68 N/A Pure Joy must close its books and prepare its third-quarter financial statements on September 30. The…arrow_forwardForward exchange contract designated as a fair value hedge of a foreign-currency-denominated accounts payable, strengthening $US On October 20, 2018, our company purchased from a company located in Slovenia 100,000 units of a product at a purchase price of €7.00 per unit. Our company is required to pay for the merchandise in Euros (€). The exchange rate on the date of purchase is $1.48:€1, and the due date for our payment is January 20, 2019. To mitigate the risk of exchange rate fluctuations between the purchase date and the payment date, on October 20, 2018, our company enters into a forward contract with an exchange broker. The contract obligates our company to buy €700,000 on January 20, 2019, while we lock in the $US we will pay for the Euros on that date at the forward rate of $1.45:€1 (i.e., the forward rate on October 20, 2018, for settlement on January 20, 2019). Assume this derivative qualifies as a fair value hedge, and our company’s functional currency and reporting…arrow_forward
- The spot foreign exchange rate for the US dollar is 0.69056 Euros. Yourcompany agrees to pay a bank 63,694 Euros in 3 months in exchange for 100,000US dollars. This is a foreign currency forward contract. No cash is exchanged upfront. Give the underlying asset, the maturity date, and the forward rate (for theUS dollar). Compare to the spot forward rate. Concludearrow_forwardForward exchange contract designated as a fair value hedge of a foreign-currency-denominated firm commitment to sell inventory, weakening $US Our U.S.-based company enters into a “firm commitment” with Malta-based retailer on November 10, 2018. The firm commitment requires our company to sell 70,000 units of an inventory item costing €9.00 each to the Maltese company. Our company is contractually committed to ship the inventory (i.e., title transfers) on February 10, 2019, with payment in Euros on the same date. Our company does recurring business with the Maltese company, and the firm commitment includes significant monetary penalties for nonperformance. Also assume, on November 10, 2018, our company enters into a contract with a foreign currency exchange broker to sell Euros (for settlement on February 10, 2019) to mitigate the risk of exchange rate fluctuation. Our company’s functional currency is the U.S. dollar and our forward exchange contract qualifies as a fair value hedge. The…arrow_forwardMyway Company sold equipment to a Canadian company for 100,000 Canadian dollars (C$) on January 1, 20X9, with settlement to be in 60 days. On the same date, Alman entered into a 60-day forward contract to sell 100,000 Canadian dollars at a forward rate of 1 C$ = $.94 in order to manage its exposed foreign currency receivable. The forward contract is not designated as a hedge. The spot rates were: January 1 (1 C$ = $0945); March 1 (1C$ = $0.930). Based on the preceding information, the entry to revalue foreign currency payable to current U.S. dollar value on March 1 will have: A. a credit to Foreign Currency Transaction Gain for $1,500. B. a debit to Foreign Currency Transaction Loss for $2,500. C. a debit to Foreign Currency Transaction Loss for $1,500. D. a credit to Foreign Currency Transaction Gain for $1,000.arrow_forward
- 1. On September 1, 20X1, Cano & Company, a U.S. corporation, sold merchandise to a foreign firm for 250,000 euros. Terms of the sale require payment in euros on February 1, 20X2. On September 1, 20X1, the spot exchange rate was $1.30 per euro. At Cano’s year-end on December 31, 20X1, the spot rate was $1.28, but the rate increased to $1.33 by February 1, 20X2, when payment was received. Required: What foreign currency transaction gain or loss should be recorded in 20X1? What foreign currency transaction gain or loss should be recorded in 20X2? Amount Gain / Loss 1. Foreign currency transaction gain (loss) 20X1 2. Foreign currency transaction gain (loss) - 20X2arrow_forwardOn November 1, 20X6, Smith Imports Incorporated contracted to purchase teacups from England for £50,000. The teacups were to be delivered on January 30, 20X7, with payment due on March 1, 20X7. On November 1, 20X6, Smith entered into a 120-day forward contract to receive 50,000 pounds at a forward rate of £1 = $1.55. The forward contract was acquired to hedge the financial component of the foreign currency commitment. Additional Information for the Exchange Rate Assume the company uses the forward rate in measuring the forward exchange contract and for measuring hedge effectiveness. Spot and exchange rates follow: Date Spot Rate Forward Rate for March 1, 20X7 November 1, 20X6 £1 = $1.60 £1 = $ 1.55 December 31, 20X6 £1 = 1.63 £1 = 1.60 January 30, 20X7 £1 = 1.55 £1 = 1.56 March 1, 20X7 £1 = 1.545 Required: b. Prepare all journal entries from November 1, 20X6, through March 1, 20X7, for the purchase of the teacups, the forward exchange contract, and the foreign…arrow_forwardForeign currency hedge, firm purchase commitment. On October 2, 2016, Flx, a US company, entered into a forward contract to purcahse 50,000 euros for delivery in 180 days at a rate of $0.6350. The forward contract is a derivative instrument hedging an identifiable foreign currency purchase commitment for inventory as defined in ASC Topic 815. The spot rate for euros on October 2, 2016 was $0.6250. Spot rates and forward rates for euros on December 31, 2016 are as follows: December 31, 2016 March 31, 2017 Spot Rate $0.6390 $0.6560 Forward Rates 30-day futures $0.6410 $0.65750 90-day futures $0.6420 $0.6615 180-day futures $0.6450 $0.6680 Required: Prepare Journal Entries 1. Record the forward contract on…arrow_forward
- On September 1, 2019 Philips corporation sold merchandise to a foreign customer for 300,000 Brazilian real with payment to be received on March 1, 2020. At the date of sale, Philips entered into a six month forward contract to sell 300,000 reals. The forward contract was properly designated as a fair value hedge. The following exchange rates apply: Date Spot rate Forward rate (to March 1, 2020) September 1, 2019 $0.46 $ 0.49 December 31, 2019 0.50 0.52 March 1, 2020 0.54 Philips’ incremental borrowing rate is 12%. The present value factor at an annual interest rate of 12% is .9610. What journal entry should Philips prepare to record the value of the forward contract on December…arrow_forwardOn June 1, Parker-Mae Corporation (a U.S.-based company) received an order to sell goods to a foreign customer at a price of 165,000 francs. Parker-Mae will ship the goods and receive payment in three months, on September 1. On June 1, Parker-Mae purchased an option to sell 165,000 francs in three months at a strike price of $1.04. The company designated the option as a fair value hedge of a foreign currency firm commitment. The option's time value is excluded in assessing hedge effectiveness, and the change in time value is recognized in net income. The fair value of the firm commitment is measured by referring to changes in the spot rate (discounting to present value is ignored). Relevant exchange rates and option premiums for the franc are as follows: Date Spot Rate Put Option Premiumfor September 1(strike price $1.04) June 1 1.04 0.020 June 30 0.98 0.072 September 1 0.93 N/A Parker-Mae Corporation must close its books…arrow_forwardOn June 1, Vandervelde Corporation (a U.S.-based manufacturing firm) received an order to sell goods to a foreign customer at a price of 100,000 leks. Vandervelde will ship the goods and receive payment in three months on September 1. On June 1, Vandervelde purchased an option to sell 100,000 leks in three months at a strike price of $1.00. It properly designated the option as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured by referring to changes in the spot rate. Relevant exchange rates and option premiums for the lek are as follows: Date Spot Rate Put option premium for September 1 (strike price $1.00) June 1 $1.00 $0.020 June 30 0.94 0.028 September1 0.88 N/A Vandervelde’s incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent (1 percent per month) is 0.9803. Vandervelde Corporation must close its books and prepare its second-quarter financial…arrow_forward
- Financial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage Learning