a
Introduction: The forward exchanges market is a well-organized market under which foreign exchange contracts of different combinations are available showing exchange rates of currencies for a month, three months, and six months forward rates. For companies willing to deal in forward exchange has to deal with these dealers. The forward rate is the expected rate of a foreign currency on a future date; it may not be same as the spot rate on the same date. The strength or weakness of a currency can be ascertained by this forward rate. If the forward is higher than the spot rate the expectation would be said currency will be strong in a future date. The variation between the forward rate and the spot rate on a given date is called the spread. The strength or weakness of the given currency can be determined by this spread.
The entries recorded by J for given transactions.
a
Explanation of Solution
Date | Particular | Debit $ | Credit $ |
May 14 | 26,500 | ||
Sales revenue | 26,500 | ||
(Foreign currency sales recognized) | |||
Foreign currency receivable from broker | 27,050 | ||
Dollars payable to exchange broker | 27,050 | ||
(Signed a forward exchange contract for 60 days) | |||
June 30 | Accounts receivable | 200 | |
Foreign currency transaction gain | 200 | ||
(Revaluation of foreign currency receivable to end of period using U.S dollar equivalent with spot rate) | |||
Foreign currency payable exchange broker | 550 | ||
Foreign currency transaction gain | 550 | ||
(Foreign currency gain on revaluation recognized on December 31) | |||
Foreign currency transaction loss | 450 | ||
Accounts receivable | 450 | ||
(Revaluation of foreign currency receivable) | |||
Foreign currency units | 26,250 | ||
Accounts receivable | 26,250 | ||
(Collection of foreign currency receivable) | |||
July 13 | Foreign currency payable to exchange broker | 250 | |
Foreign currency transaction gain | 250 | ||
(Revaluation of foreign currency payable to fair value at settlement date using spot rate) | |||
Foreign currency payable to exchange broker | 26,250 | ||
Foreign currency units | 26,250 | ||
(Received dollars from exchange broker) |
- Foreign currency sales recognized
- Signed 6o days forward contact to deliver guilders
- Revaluation of foreign currency receivable to end of period, U.S. dollar equivalent using spot rate
- Revaluation of foreign currency payable to year end fair value using forward rate:
- Revaluation of foreign currency receivable to current equivalent U.S. dollar
- Received foreign currency unit on accounts receivable.
- Revaluation of foreign currency transaction gain on settlement date using spot rate
- Paid guilders to exchange brokers
- Receive dollars from exchange brokers for guilders delivery
$26,700 | |
(26,500) | |
$200 |
$26,500 | |
(27,050) | |
$550 |
$26,250 | |
(26,700) | |
$450 |
$26,250 | |
(26,500) | |
$250 |
b
Introduction: The forward exchanges market is a well-organized market under which foreign exchange contracts of different combinations are available showing exchange rates of currencies for a month, three months, and six months forward rates. For companies willing to deal in forward exchange has to deal with these dealers. The forward rate is the expected rate of a foreign currency on a future date; it may not be same as the spot rate on the same date. The strength or weakness of a currency can be ascertained by this forward rate. If the forward is higher than the spot rate the expectation would be said currency will be strong in a future date. The variation between the forward rate and the spot rate on a given date is called the spread. The strength or weakness of the given currency can be determined by this spread.
The effect on the income statement in fiscal year ending June 30.
b
Answer to Problem 11.15E
Increase in net income for fiscal year June 30 $750
Explanation of Solution
$ | |
Foreign currency transaction gain on account from Netherlands Company | 200 |
Foreign currency transaction gain on account of brokers | 550 |
Net increase in net income of fiscal year | 750 |
- Revaluation of foreign currency receivable to end of period, U.S. dollar equivalent using spot rate
- Revaluation of foreign currency payable to year end fair value using forward rate:
$26,700 | |
(26,500) | |
$200 |
$26,500 | |
(27,050) | |
$550 |
c
Introduction: The forward exchanges market is a well-organized market under which foreign exchange contracts of different combinations are available showing exchange rates of currencies for a month, three months, and six months forward rates. For companies willing to deal in forward exchange has to deal with these dealers. The forward rate is the expected rate of a foreign currency on a future date; it may not be same as the spot rate on the same date. The strength or weakness of a currency can be ascertained by this forward rate. If the forward is higher than the spot rate the expectation would be said currency will be strong in a future date. The variation between the forward rate and the spot rate on a given date is called the spread. The strength or weakness of the given currency can be determined by this spread.
The overall effect of this transaction on income statement
c
Answer to Problem 11.15E
Overall transaction gain $550
Explanation of Solution
$ | |
Foreign currency transaction gain on account from Netherlands Company | (450) |
Foreign currency transaction gain on account of brokers | 250 |
Net decrease in net income for the period from June 1 to June 13 | (200) |
Net increase in net income for fiscal year | 750 |
Overall gain on transaction | 550 |
- Revaluation of foreign currency receivable to current equivalent U.S. dollar
- Revaluation of foreign currency transaction gain on settlement date using spot rate
$26,250 | |
(26,700) | |
$450 |
$26,250 | |
(26,500) | |
$250 |
$ | |
Foreign currency transaction gain on account from Netherlands Company | 200 |
Foreign currency transaction gain on account of brokers | 550 |
Net increase in net income of fiscal year | 750 |
d
Introduction: The forward exchanges market is a well-organized market under which foreign exchange contracts of different combinations are available showing exchange rates of currencies for a month, three months, and six months forward rates. For companies willing to deal in forward exchange has to deal with these dealers. The forward rate is the expected rate of a foreign currency on a future date; it may not be same as the spot rate on the same date. The strength or weakness of a currency can be ascertained by this forward rate. If the forward is higher than the spot rate the expectation would be said currency will be strong in a future date. The variation between the forward rate and the spot rate on a given date is called the spread. The strength or weakness of the given currency can be determined by this spread.
The overall effect income if forward contract had not been acquired
d
Answer to Problem 11.15E
Over all loss $(250)
Explanation of Solution
$ | |
May 14 − Gain on June 30 | $200 |
July 1 − loss on July 13 | (450) |
Over all loss if forward contract not used | $(250) |
- Revaluation of foreign currency receivable to current equivalent U.S. dollar
- Revaluation of foreign currency transaction gain on settlement date using spot rate
$26,250 | |
(26,700) | |
$450 |
$26,250 | |
(26,500) | |
$250 |
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Chapter 11 Solutions
Advanced Financial Accounting
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