Derivatives designed as hedge: To reduce risks, ASC 815 provides specific requirements for classifying derivative as a hedge. Hedge accounting offsets the gain or loss on the hedged instrument. Hedges can be used to offset foreign currency exchange rate risk, interest rate risk and commodity risk. A derivative instrument in order to qualify as a hedge must have sufficient documentation at the beginning of the hedge term to identify the objective of the hedge. The hedge must be highly effective throughout its term. The effectiveness must be tested every three months and each time the financial instrument is prepared. The net exposure to changes in exchange rate of pounds for dollars between November 1, 20X6 and March 1, 20X7.

Question

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Answer 1

Question

Chapter 11, Problem 11.16AE

a

To determine

Introduction:

Derivatives designed as hedge: To reduce risks, ASC 815 provides specific requirements for classifying derivative as a hedge. Hedge accounting offsets the gain or loss on the hedged instrument. Hedges can be used to offset foreign currency exchange rate risk, interest rate risk and commodity risk. A derivative instrument in order to qualify as a hedge must have sufficient documentation at the beginning of the hedge term to identify the objective of the hedge. The hedge must be highly effective throughout its term. The effectiveness must be tested every three months and each time the financial instrument is prepared.

The net exposure to changes in exchange rate of pounds for dollars between November 1, 20X6 and March 1, 20X7.

a

Expert Solution

Answer to Problem 11.16AE

No net exposure from November 1, 20X6 and March 1, 20X7.

Explanation of Solution

Earning from Forward contract £30,000 × ($1.61 − $1.59)	$600
Less adjustment when inventory sold £30,000 × ($1.59 − $1.60)	($300)
Earning through revaluation £30,000 × ($1.59 − $1.60)	($300)
Net exposure	0

b

To determine

Introduction:

Derivatives designed as hedge: To reduce risks, ASC 815 provides specific requirements for classifying derivative as a hedge. Hedge accounting offsets the gain or loss on the hedged instrument. Hedges can be used to offset foreign currency exchange rate risk, interest rate risk and commodity risk. A derivative instrument in order to qualify as a hedge must have sufficient documentation at the beginning of the hedge term to identify the objective of the hedge. The hedge must be highly effective throughout its term. The effectiveness must be tested every three months and each time the financial instrument is prepared.

The entries for the purchase of inventory and forward contract during November 1, 20X6 through March 1, 20X7 Assuming fiscal year ends on December 31, 20X6

b

Expert Solution

Explanation of Solution

Date	Particulars	Debit $	Credit $
11/1/20X6	Foreign currency receivable from exchange broker	47,700
	Dollars payable to exchange broker		47,700
	(Entered into foreign exchange contract to manage foreign currency exposer)

12/31/20X6	Foreign currency receivable from exchange broker	900
	Foreign currency transaction gain		900
	(Revaluation of foreign currency receivable to end of period fair value)

12/31/X6	Foreign currency transaction loss	900
	Firm commitment		900
	(Record the loss on the financial instrument aspect of the firm commitment)

1/30/20X7	Foreign currency transaction loss	600
	Foreign currency receivable from exchange broker		600
	(Revaluation of foreign currency receivable to U.S. dollar equivalent)

	Firm commitment	600
	Foreign currency transaction gain		600
	(Recording of gain on the financial instrument aspect of the firm commitment)

	Purchases	47,400
	Firm commitment	300
	Accounts payable		47,700
	(Purchased and recognized foreign currency payable)

03/1/20X7	Foreign currency transaction loss	450
	Foreign currency receivable from exchange broker		450
	(Revaluation of foreign currency receivable)

	Accounts payable	150
	Foreign currency transaction gain		150
	(Revaluation of foreign currency payable)

	Dollars payable to exchange broker	47,700
	Cash		47,700
	(Delivery of dollars to exchange broker as per the exchange contract)

	Foreign currency unit (A$)	47,550
	Foreign currency receivable from exchange broker		47,550
	(Received £30,000 from exchange broker in accordance with contract)

Signed forward contract to manage foreign currency exposer

$47,700 = £30,000 × $1.59

Foreign currency transaction gain of revaluation of receivable

$900 = £30,000 × ($1.62 − $1.59)

Loss on firm commitment recognized

$900 = £30,000 × ($1.62 − $1.59)

Revaluation of foreign currency receivable to current U.S. dollar

$600 = £30,000 × ($1.60 − $1.62)

Recognized gain on the financial instrument aspect of firm commitment.

$600 = £30,000 × ($1.60 − $1.62)

Purchase of inventory committed

$47,700= £30,000 × $1.59 Jan 30 Spot

Revaluation of foreign currency receivable to fair value

$450 = £30,000 × ($1.585 − $1.60)

Revaluation of foreign currency payable with change in spot from $1.59 to $1.585

$150 = £30,000 × ($1.585 − $1.59)

Received £30,000 in exchange of U.S. dollar

$47,700= £30,000 × $1.59 Jan 30 Spot

Received £30,000 in exchange of U.S. dollar from exchange broker

$47,700= £30,000 × $1.585 Mar 1 Spot

£30,000 delivered to creditor.

c

To determine

Introduction:

Derivatives designed as hedge: To reduce risks, ASC 815 provides specific requirements for classifying derivative as a hedge. Hedge accounting offsets the gain or loss on the hedged instrument. Hedges can be used to offset foreign currency exchange rate risk, interest rate risk and commodity risk. A derivative instrument in order to qualify as a hedge must have sufficient documentation at the beginning of the hedge term to identify the objective of the hedge. The hedge must be highly effective throughout its term. The effectiveness must be tested every three months and each time the financial instrument is prepared.

The entries assuming that interest is significant and the time value of money is considered in valuing forward contract.

c

Expert Solution

Explanation of Solution

Date	Particulars	Debit $	Credit $
11/1/20X6	Foreign currency receivable from exchange broker	47,700
	Dollars payable to exchange broker		47,700
	(Entered into foreign exchange contract to manage foreign currency exposer)

12/31/X6	Foreign currency receivable from exchange broker	882
	Foreign currency transaction gain		882
	(Revaluation of foreign currency receivable)

	Foreign currency transaction loss	882
	Accounts payable		882
	(Revaluation of foreign currency payable)

01/30/20X7	Foreign currency transaction loss	585
	Foreign currency receivable from exchange broker		585
	(Revaluation of foreign currency receivable recognized )

	Firm commitment	585
	Foreign currency transaction gain		585
	(Gain on financial instrument aspect of the firm commitment recognized)

	Purchases	47,403
	Firm commitment	297
	Accounts payable		47,700
	(Accounts payable in foreign currency recognized)

3/1/20X7	Foreign currency transaction loss	447
	Foreign currency receivable from exchange broker		447
	(Revaluation of foreign currency receivable to fair value)

	Accounts payable	150
	Foreign currency transaction gain		150
	(Revaluation of foreign currency payable to equivalent U.S. dollars)

	Dollars payable to exchange broker	47,700
	Cash		47,700
	(Delivery of dollars to exchange broker as per the exchange contract)

	Foreign currency unit (A$)	47,550
	Foreign currency receivable from exchange broker		47,550
	(Received £30,000 from exchange broker in accordance with contract)

	Accounts payable	47,550
	Foreign currency Units		47,550
	(Foreign currency unit paid to creditor)

Signed forward contract to manage foreign currency exposer

$60,900 = £30,000 × $1.59

Revaluation of foreign currency receivable to discounted end of period fair value:

Gain on foreign currency transaction £30,000 × ($1.62 −$1.59)	$900
Adjustment of discount ($900 × .12) ×212	($18)
Discounted gains	$882

Revaluation of foreign currency receivable to current U.S. dollar equivalent:

Gain on foreign currency receivable £30,000 × ($1.60 −$1.59)	$300
Adjustment of discount ($300 × .12) ×112	($3)
Discounted gains	$297
Less: gain recognized previously	(882)
Net change in fair value	($585)

Purchase of inventory valued at spot rate $47,700 = £30,000 × $1.59
Revaluation of foreign currency receivable to current U.S. dollar and recognized:

Undiscounted loss on forward contract £30,000 × ($1.585 −$1.59)	($150)
Less: previously recognized net gain	($297)
Loss for the period	$447

Revaluation of foreign currency payable equivalent to U.S. dollars

$150 = £30,000 × ($1.585 −$1.59)

Purchase of inventory commitment met

$47,700 =£30,000 × $1.59

Received £30,000 from exchange broker in accordance with forward contract

$47,550 =£30,000 × $1.585 Mar 1 Spot rate

£30,000 delivered to creditor.

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Students have asked these similar questions

a) On January 1, 2022, Dymaxium Inc. a Canadian company, sold Alberta beef to a foreign company for FC$200,000, with payment due on March 1, 2008. ON the same date, Dymaxium entered into a forward contract with the bank to sell the foreign currency (FC) it will receive on March 1, 2022 at a rate of FC1=C$1.16. The forward contract was designed as a fair value hedge of the FC receivable. On March 1, 2022, Dymaxium received the payment from the foreign company and settled the forward contract with the bank. Spot exchange rates were as follows: January 1, 2022 FC1 = C$1.18 March 1, 2022 FC1 = C$1.19 Required Prepare journal entries to record the above transactions 1

On December 1, 20X8, Denizen Corporation entered into a 120-day forward contract to purchase 200,000 Canadian dollars (C$). Denizen's fiscal year ends on December 31. The forward contract was to hedge a firm commitment agreement made on December 1, 20X8, to purchase electronic goods on January 30, with payment due on March 31, 20X8. The derivative is designated as a fair value hedge. The direct exchange rates follow: Spot Rate Forward Rate for March 1, 20X9 December 1, 20X8 $ 0.940 $ 0.944 December 31, 20X8 $ 0.945 $ 0.947 January 30, 20X9 $ 0.942 $ 0.943 March 31, 20X9 $ 0.941 Required: Prepare all journal entries for Denizen Corporation.

On June 1, Maxwell Corporation (a U.S.-based company) sold goods to a foreign customer at a price of 1,080,000 pesos and will receive payment in three months on September 1. On June 1, Maxwell acquired an option to sell 1,080,000 pesos in three months at a strike price of $0.106. The time value of the option is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income over the life of the option. Relevant exchange rates and option premia for the peso are as follows: Date Spot Rate Put Option Premiumfor September 1(strike price $0.106) June 1 $ 0.106 $ 0.0069 June 30 0.105 0.0044 September 1 0.104 N/A Maxwell must close its books and prepare its second-quarter financial statements on June 30. a-1. Assuming that Maxwell designates the foreign currency option as a cash flow hedge of a foreign currency receivable, prepare journal entries for the export sale and related hedge in U.S. dollars.…

Answer 2

Question

Chapter 11, Problem 11.16AE

a

To determine

Introduction:

Derivatives designed as hedge: To reduce risks, ASC 815 provides specific requirements for classifying derivative as a hedge. Hedge accounting offsets the gain or loss on the hedged instrument. Hedges can be used to offset foreign currency exchange rate risk, interest rate risk and commodity risk. A derivative instrument in order to qualify as a hedge must have sufficient documentation at the beginning of the hedge term to identify the objective of the hedge. The hedge must be highly effective throughout its term. The effectiveness must be tested every three months and each time the financial instrument is prepared.

The net exposure to changes in exchange rate of pounds for dollars between November 1, 20X6 and March 1, 20X7.

a

Expert Solution

Answer to Problem 11.16AE

No net exposure from November 1, 20X6 and March 1, 20X7.

Explanation of Solution

Earning from Forward contract £30,000 × ($1.61 − $1.59)	$600
Less adjustment when inventory sold £30,000 × ($1.59 − $1.60)	($300)
Earning through revaluation £30,000 × ($1.59 − $1.60)	($300)
Net exposure	0

b

To determine

Introduction:

Derivatives designed as hedge: To reduce risks, ASC 815 provides specific requirements for classifying derivative as a hedge. Hedge accounting offsets the gain or loss on the hedged instrument. Hedges can be used to offset foreign currency exchange rate risk, interest rate risk and commodity risk. A derivative instrument in order to qualify as a hedge must have sufficient documentation at the beginning of the hedge term to identify the objective of the hedge. The hedge must be highly effective throughout its term. The effectiveness must be tested every three months and each time the financial instrument is prepared.

The entries for the purchase of inventory and forward contract during November 1, 20X6 through March 1, 20X7 Assuming fiscal year ends on December 31, 20X6

b

Expert Solution

Explanation of Solution

Date	Particulars	Debit $	Credit $
11/1/20X6	Foreign currency receivable from exchange broker	47,700
	Dollars payable to exchange broker		47,700
	(Entered into foreign exchange contract to manage foreign currency exposer)

12/31/20X6	Foreign currency receivable from exchange broker	900
	Foreign currency transaction gain		900
	(Revaluation of foreign currency receivable to end of period fair value)

12/31/X6	Foreign currency transaction loss	900
	Firm commitment		900
	(Record the loss on the financial instrument aspect of the firm commitment)

1/30/20X7	Foreign currency transaction loss	600
	Foreign currency receivable from exchange broker		600
	(Revaluation of foreign currency receivable to U.S. dollar equivalent)

	Firm commitment	600
	Foreign currency transaction gain		600
	(Recording of gain on the financial instrument aspect of the firm commitment)

	Purchases	47,400
	Firm commitment	300
	Accounts payable		47,700
	(Purchased and recognized foreign currency payable)

03/1/20X7	Foreign currency transaction loss	450
	Foreign currency receivable from exchange broker		450
	(Revaluation of foreign currency receivable)

	Accounts payable	150
	Foreign currency transaction gain		150
	(Revaluation of foreign currency payable)

	Dollars payable to exchange broker	47,700
	Cash		47,700
	(Delivery of dollars to exchange broker as per the exchange contract)

	Foreign currency unit (A$)	47,550
	Foreign currency receivable from exchange broker		47,550
	(Received £30,000 from exchange broker in accordance with contract)

Signed forward contract to manage foreign currency exposer

$47,700 = £30,000 × $1.59

Foreign currency transaction gain of revaluation of receivable

$900 = £30,000 × ($1.62 − $1.59)

Loss on firm commitment recognized

$900 = £30,000 × ($1.62 − $1.59)

Revaluation of foreign currency receivable to current U.S. dollar

$600 = £30,000 × ($1.60 − $1.62)

Recognized gain on the financial instrument aspect of firm commitment.

$600 = £30,000 × ($1.60 − $1.62)

Purchase of inventory committed

$47,700= £30,000 × $1.59 Jan 30 Spot

Revaluation of foreign currency receivable to fair value

$450 = £30,000 × ($1.585 − $1.60)

Revaluation of foreign currency payable with change in spot from $1.59 to $1.585

$150 = £30,000 × ($1.585 − $1.59)

Received £30,000 in exchange of U.S. dollar

$47,700= £30,000 × $1.59 Jan 30 Spot

Received £30,000 in exchange of U.S. dollar from exchange broker

$47,700= £30,000 × $1.585 Mar 1 Spot

£30,000 delivered to creditor.

c

To determine

Introduction:

Derivatives designed as hedge: To reduce risks, ASC 815 provides specific requirements for classifying derivative as a hedge. Hedge accounting offsets the gain or loss on the hedged instrument. Hedges can be used to offset foreign currency exchange rate risk, interest rate risk and commodity risk. A derivative instrument in order to qualify as a hedge must have sufficient documentation at the beginning of the hedge term to identify the objective of the hedge. The hedge must be highly effective throughout its term. The effectiveness must be tested every three months and each time the financial instrument is prepared.

The entries assuming that interest is significant and the time value of money is considered in valuing forward contract.

c

Expert Solution

Explanation of Solution

Date	Particulars	Debit $	Credit $
11/1/20X6	Foreign currency receivable from exchange broker	47,700
	Dollars payable to exchange broker		47,700
	(Entered into foreign exchange contract to manage foreign currency exposer)

12/31/X6	Foreign currency receivable from exchange broker	882
	Foreign currency transaction gain		882
	(Revaluation of foreign currency receivable)

	Foreign currency transaction loss	882
	Accounts payable		882
	(Revaluation of foreign currency payable)

01/30/20X7	Foreign currency transaction loss	585
	Foreign currency receivable from exchange broker		585
	(Revaluation of foreign currency receivable recognized )

	Firm commitment	585
	Foreign currency transaction gain		585
	(Gain on financial instrument aspect of the firm commitment recognized)

	Purchases	47,403
	Firm commitment	297
	Accounts payable		47,700
	(Accounts payable in foreign currency recognized)

3/1/20X7	Foreign currency transaction loss	447
	Foreign currency receivable from exchange broker		447
	(Revaluation of foreign currency receivable to fair value)

	Accounts payable	150
	Foreign currency transaction gain		150
	(Revaluation of foreign currency payable to equivalent U.S. dollars)

	Dollars payable to exchange broker	47,700
	Cash		47,700
	(Delivery of dollars to exchange broker as per the exchange contract)

	Foreign currency unit (A$)	47,550
	Foreign currency receivable from exchange broker		47,550
	(Received £30,000 from exchange broker in accordance with contract)

	Accounts payable	47,550
	Foreign currency Units		47,550
	(Foreign currency unit paid to creditor)

Signed forward contract to manage foreign currency exposer

$60,900 = £30,000 × $1.59

Revaluation of foreign currency receivable to discounted end of period fair value:

Gain on foreign currency transaction £30,000 × ($1.62 −$1.59)	$900
Adjustment of discount ($900 × .12) ×212	($18)
Discounted gains	$882

Revaluation of foreign currency receivable to current U.S. dollar equivalent:

Gain on foreign currency receivable £30,000 × ($1.60 −$1.59)	$300
Adjustment of discount ($300 × .12) ×112	($3)
Discounted gains	$297
Less: gain recognized previously	(882)
Net change in fair value	($585)

Purchase of inventory valued at spot rate $47,700 = £30,000 × $1.59
Revaluation of foreign currency receivable to current U.S. dollar and recognized:

Undiscounted loss on forward contract £30,000 × ($1.585 −$1.59)	($150)
Less: previously recognized net gain	($297)
Loss for the period	$447

Revaluation of foreign currency payable equivalent to U.S. dollars

$150 = £30,000 × ($1.585 −$1.59)

Purchase of inventory commitment met

$47,700 =£30,000 × $1.59

Received £30,000 from exchange broker in accordance with forward contract

$47,550 =£30,000 × $1.585 Mar 1 Spot rate

£30,000 delivered to creditor.

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Answer 3

Question

Chapter 11, Problem 11.16AE

a

To determine

Introduction:

Derivatives designed as hedge: To reduce risks, ASC 815 provides specific requirements for classifying derivative as a hedge. Hedge accounting offsets the gain or loss on the hedged instrument. Hedges can be used to offset foreign currency exchange rate risk, interest rate risk and commodity risk. A derivative instrument in order to qualify as a hedge must have sufficient documentation at the beginning of the hedge term to identify the objective of the hedge. The hedge must be highly effective throughout its term. The effectiveness must be tested every three months and each time the financial instrument is prepared.

The net exposure to changes in exchange rate of pounds for dollars between November 1, 20X6 and March 1, 20X7.

a

Expert Solution

Answer to Problem 11.16AE

No net exposure from November 1, 20X6 and March 1, 20X7.

Explanation of Solution

Earning from Forward contract £30,000 × ($1.61 − $1.59)	$600
Less adjustment when inventory sold £30,000 × ($1.59 − $1.60)	($300)
Earning through revaluation £30,000 × ($1.59 − $1.60)	($300)
Net exposure	0

b

To determine

Introduction:

Derivatives designed as hedge: To reduce risks, ASC 815 provides specific requirements for classifying derivative as a hedge. Hedge accounting offsets the gain or loss on the hedged instrument. Hedges can be used to offset foreign currency exchange rate risk, interest rate risk and commodity risk. A derivative instrument in order to qualify as a hedge must have sufficient documentation at the beginning of the hedge term to identify the objective of the hedge. The hedge must be highly effective throughout its term. The effectiveness must be tested every three months and each time the financial instrument is prepared.

The entries for the purchase of inventory and forward contract during November 1, 20X6 through March 1, 20X7 Assuming fiscal year ends on December 31, 20X6

b

Expert Solution

Explanation of Solution

Date	Particulars	Debit $	Credit $
11/1/20X6	Foreign currency receivable from exchange broker	47,700
	Dollars payable to exchange broker		47,700
	(Entered into foreign exchange contract to manage foreign currency exposer)

12/31/20X6	Foreign currency receivable from exchange broker	900
	Foreign currency transaction gain		900
	(Revaluation of foreign currency receivable to end of period fair value)

12/31/X6	Foreign currency transaction loss	900
	Firm commitment		900
	(Record the loss on the financial instrument aspect of the firm commitment)

1/30/20X7	Foreign currency transaction loss	600
	Foreign currency receivable from exchange broker		600
	(Revaluation of foreign currency receivable to U.S. dollar equivalent)

	Firm commitment	600
	Foreign currency transaction gain		600
	(Recording of gain on the financial instrument aspect of the firm commitment)

	Purchases	47,400
	Firm commitment	300
	Accounts payable		47,700
	(Purchased and recognized foreign currency payable)

03/1/20X7	Foreign currency transaction loss	450
	Foreign currency receivable from exchange broker		450
	(Revaluation of foreign currency receivable)

	Accounts payable	150
	Foreign currency transaction gain		150
	(Revaluation of foreign currency payable)

	Dollars payable to exchange broker	47,700
	Cash		47,700
	(Delivery of dollars to exchange broker as per the exchange contract)

	Foreign currency unit (A$)	47,550
	Foreign currency receivable from exchange broker		47,550
	(Received £30,000 from exchange broker in accordance with contract)

Signed forward contract to manage foreign currency exposer

$47,700 = £30,000 × $1.59

Foreign currency transaction gain of revaluation of receivable

$900 = £30,000 × ($1.62 − $1.59)

Loss on firm commitment recognized

$900 = £30,000 × ($1.62 − $1.59)

Revaluation of foreign currency receivable to current U.S. dollar

$600 = £30,000 × ($1.60 − $1.62)

Recognized gain on the financial instrument aspect of firm commitment.

$600 = £30,000 × ($1.60 − $1.62)

Purchase of inventory committed

$47,700= £30,000 × $1.59 Jan 30 Spot

Revaluation of foreign currency receivable to fair value

$450 = £30,000 × ($1.585 − $1.60)

Revaluation of foreign currency payable with change in spot from $1.59 to $1.585

$150 = £30,000 × ($1.585 − $1.59)

Received £30,000 in exchange of U.S. dollar

$47,700= £30,000 × $1.59 Jan 30 Spot

Received £30,000 in exchange of U.S. dollar from exchange broker

$47,700= £30,000 × $1.585 Mar 1 Spot

£30,000 delivered to creditor.

c

To determine

Introduction:

Derivatives designed as hedge: To reduce risks, ASC 815 provides specific requirements for classifying derivative as a hedge. Hedge accounting offsets the gain or loss on the hedged instrument. Hedges can be used to offset foreign currency exchange rate risk, interest rate risk and commodity risk. A derivative instrument in order to qualify as a hedge must have sufficient documentation at the beginning of the hedge term to identify the objective of the hedge. The hedge must be highly effective throughout its term. The effectiveness must be tested every three months and each time the financial instrument is prepared.

The entries assuming that interest is significant and the time value of money is considered in valuing forward contract.

c

Expert Solution

Explanation of Solution

Date	Particulars	Debit $	Credit $
11/1/20X6	Foreign currency receivable from exchange broker	47,700
	Dollars payable to exchange broker		47,700
	(Entered into foreign exchange contract to manage foreign currency exposer)

12/31/X6	Foreign currency receivable from exchange broker	882
	Foreign currency transaction gain		882
	(Revaluation of foreign currency receivable)

	Foreign currency transaction loss	882
	Accounts payable		882
	(Revaluation of foreign currency payable)

01/30/20X7	Foreign currency transaction loss	585
	Foreign currency receivable from exchange broker		585
	(Revaluation of foreign currency receivable recognized )

	Firm commitment	585
	Foreign currency transaction gain		585
	(Gain on financial instrument aspect of the firm commitment recognized)

	Purchases	47,403
	Firm commitment	297
	Accounts payable		47,700
	(Accounts payable in foreign currency recognized)

3/1/20X7	Foreign currency transaction loss	447
	Foreign currency receivable from exchange broker		447
	(Revaluation of foreign currency receivable to fair value)

	Accounts payable	150
	Foreign currency transaction gain		150
	(Revaluation of foreign currency payable to equivalent U.S. dollars)

	Dollars payable to exchange broker	47,700
	Cash		47,700
	(Delivery of dollars to exchange broker as per the exchange contract)

	Foreign currency unit (A$)	47,550
	Foreign currency receivable from exchange broker		47,550
	(Received £30,000 from exchange broker in accordance with contract)

	Accounts payable	47,550
	Foreign currency Units		47,550
	(Foreign currency unit paid to creditor)

Signed forward contract to manage foreign currency exposer

$60,900 = £30,000 × $1.59

Revaluation of foreign currency receivable to discounted end of period fair value:

Gain on foreign currency transaction £30,000 × ($1.62 −$1.59)	$900
Adjustment of discount ($900 × .12) ×212	($18)
Discounted gains	$882

Revaluation of foreign currency receivable to current U.S. dollar equivalent:

Gain on foreign currency receivable £30,000 × ($1.60 −$1.59)	$300
Adjustment of discount ($300 × .12) ×112	($3)
Discounted gains	$297
Less: gain recognized previously	(882)
Net change in fair value	($585)

Purchase of inventory valued at spot rate $47,700 = £30,000 × $1.59
Revaluation of foreign currency receivable to current U.S. dollar and recognized:

Undiscounted loss on forward contract £30,000 × ($1.585 −$1.59)	($150)
Less: previously recognized net gain	($297)
Loss for the period	$447

Revaluation of foreign currency payable equivalent to U.S. dollars

$150 = £30,000 × ($1.585 −$1.59)

Purchase of inventory commitment met

$47,700 =£30,000 × $1.59

Received £30,000 from exchange broker in accordance with forward contract

$47,550 =£30,000 × $1.585 Mar 1 Spot rate

£30,000 delivered to creditor.

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Answer 4

Question

Chapter 11, Problem 11.16AE

a

To determine

Introduction:

Derivatives designed as hedge: To reduce risks, ASC 815 provides specific requirements for classifying derivative as a hedge. Hedge accounting offsets the gain or loss on the hedged instrument. Hedges can be used to offset foreign currency exchange rate risk, interest rate risk and commodity risk. A derivative instrument in order to qualify as a hedge must have sufficient documentation at the beginning of the hedge term to identify the objective of the hedge. The hedge must be highly effective throughout its term. The effectiveness must be tested every three months and each time the financial instrument is prepared.

The net exposure to changes in exchange rate of pounds for dollars between November 1, 20X6 and March 1, 20X7.

a

Expert Solution

Answer to Problem 11.16AE

No net exposure from November 1, 20X6 and March 1, 20X7.

Explanation of Solution

Earning from Forward contract £30,000 × ($1.61 − $1.59)	$600
Less adjustment when inventory sold £30,000 × ($1.59 − $1.60)	($300)
Earning through revaluation £30,000 × ($1.59 − $1.60)	($300)
Net exposure	0

b

To determine

Introduction:

Derivatives designed as hedge: To reduce risks, ASC 815 provides specific requirements for classifying derivative as a hedge. Hedge accounting offsets the gain or loss on the hedged instrument. Hedges can be used to offset foreign currency exchange rate risk, interest rate risk and commodity risk. A derivative instrument in order to qualify as a hedge must have sufficient documentation at the beginning of the hedge term to identify the objective of the hedge. The hedge must be highly effective throughout its term. The effectiveness must be tested every three months and each time the financial instrument is prepared.

The entries for the purchase of inventory and forward contract during November 1, 20X6 through March 1, 20X7 Assuming fiscal year ends on December 31, 20X6

b

Expert Solution

Explanation of Solution

Date	Particulars	Debit $	Credit $
11/1/20X6	Foreign currency receivable from exchange broker	47,700
	Dollars payable to exchange broker		47,700
	(Entered into foreign exchange contract to manage foreign currency exposer)

12/31/20X6	Foreign currency receivable from exchange broker	900
	Foreign currency transaction gain		900
	(Revaluation of foreign currency receivable to end of period fair value)

12/31/X6	Foreign currency transaction loss	900
	Firm commitment		900
	(Record the loss on the financial instrument aspect of the firm commitment)

1/30/20X7	Foreign currency transaction loss	600
	Foreign currency receivable from exchange broker		600
	(Revaluation of foreign currency receivable to U.S. dollar equivalent)

	Firm commitment	600
	Foreign currency transaction gain		600
	(Recording of gain on the financial instrument aspect of the firm commitment)

	Purchases	47,400
	Firm commitment	300
	Accounts payable		47,700
	(Purchased and recognized foreign currency payable)

03/1/20X7	Foreign currency transaction loss	450
	Foreign currency receivable from exchange broker		450
	(Revaluation of foreign currency receivable)

	Accounts payable	150
	Foreign currency transaction gain		150
	(Revaluation of foreign currency payable)

	Dollars payable to exchange broker	47,700
	Cash		47,700
	(Delivery of dollars to exchange broker as per the exchange contract)

	Foreign currency unit (A$)	47,550
	Foreign currency receivable from exchange broker		47,550
	(Received £30,000 from exchange broker in accordance with contract)

Signed forward contract to manage foreign currency exposer

$47,700 = £30,000 × $1.59

Foreign currency transaction gain of revaluation of receivable

$900 = £30,000 × ($1.62 − $1.59)

Loss on firm commitment recognized

$900 = £30,000 × ($1.62 − $1.59)

Revaluation of foreign currency receivable to current U.S. dollar

$600 = £30,000 × ($1.60 − $1.62)

Recognized gain on the financial instrument aspect of firm commitment.

$600 = £30,000 × ($1.60 − $1.62)

Purchase of inventory committed

$47,700= £30,000 × $1.59 Jan 30 Spot

Revaluation of foreign currency receivable to fair value

$450 = £30,000 × ($1.585 − $1.60)

Revaluation of foreign currency payable with change in spot from $1.59 to $1.585

$150 = £30,000 × ($1.585 − $1.59)

Received £30,000 in exchange of U.S. dollar

$47,700= £30,000 × $1.59 Jan 30 Spot

Received £30,000 in exchange of U.S. dollar from exchange broker

$47,700= £30,000 × $1.585 Mar 1 Spot

£30,000 delivered to creditor.

c

To determine

Introduction:

Derivatives designed as hedge: To reduce risks, ASC 815 provides specific requirements for classifying derivative as a hedge. Hedge accounting offsets the gain or loss on the hedged instrument. Hedges can be used to offset foreign currency exchange rate risk, interest rate risk and commodity risk. A derivative instrument in order to qualify as a hedge must have sufficient documentation at the beginning of the hedge term to identify the objective of the hedge. The hedge must be highly effective throughout its term. The effectiveness must be tested every three months and each time the financial instrument is prepared.

The entries assuming that interest is significant and the time value of money is considered in valuing forward contract.

c

Expert Solution

Explanation of Solution

Date	Particulars	Debit $	Credit $
11/1/20X6	Foreign currency receivable from exchange broker	47,700
	Dollars payable to exchange broker		47,700
	(Entered into foreign exchange contract to manage foreign currency exposer)

12/31/X6	Foreign currency receivable from exchange broker	882
	Foreign currency transaction gain		882
	(Revaluation of foreign currency receivable)

	Foreign currency transaction loss	882
	Accounts payable		882
	(Revaluation of foreign currency payable)

01/30/20X7	Foreign currency transaction loss	585
	Foreign currency receivable from exchange broker		585
	(Revaluation of foreign currency receivable recognized )

	Firm commitment	585
	Foreign currency transaction gain		585
	(Gain on financial instrument aspect of the firm commitment recognized)

	Purchases	47,403
	Firm commitment	297
	Accounts payable		47,700
	(Accounts payable in foreign currency recognized)

3/1/20X7	Foreign currency transaction loss	447
	Foreign currency receivable from exchange broker		447
	(Revaluation of foreign currency receivable to fair value)

	Accounts payable	150
	Foreign currency transaction gain		150
	(Revaluation of foreign currency payable to equivalent U.S. dollars)

	Dollars payable to exchange broker	47,700
	Cash		47,700
	(Delivery of dollars to exchange broker as per the exchange contract)

	Foreign currency unit (A$)	47,550
	Foreign currency receivable from exchange broker		47,550
	(Received £30,000 from exchange broker in accordance with contract)

	Accounts payable	47,550
	Foreign currency Units		47,550
	(Foreign currency unit paid to creditor)

Signed forward contract to manage foreign currency exposer

$60,900 = £30,000 × $1.59

Revaluation of foreign currency receivable to discounted end of period fair value:

Gain on foreign currency transaction £30,000 × ($1.62 −$1.59)	$900
Adjustment of discount ($900 × .12) ×212	($18)
Discounted gains	$882

Revaluation of foreign currency receivable to current U.S. dollar equivalent:

Gain on foreign currency receivable £30,000 × ($1.60 −$1.59)	$300
Adjustment of discount ($300 × .12) ×112	($3)
Discounted gains	$297
Less: gain recognized previously	(882)
Net change in fair value	($585)

Purchase of inventory valued at spot rate $47,700 = £30,000 × $1.59
Revaluation of foreign currency receivable to current U.S. dollar and recognized:

Undiscounted loss on forward contract £30,000 × ($1.585 −$1.59)	($150)
Less: previously recognized net gain	($297)
Loss for the period	$447

Revaluation of foreign currency payable equivalent to U.S. dollars

$150 = £30,000 × ($1.585 −$1.59)

Purchase of inventory commitment met

$47,700 =£30,000 × $1.59

Received £30,000 from exchange broker in accordance with forward contract

$47,550 =£30,000 × $1.585 Mar 1 Spot rate

£30,000 delivered to creditor.

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Answer 5

Chapter 11, Problem 11.16AE

a

To determine

Introduction:

Derivatives designed as hedge: To reduce risks, ASC 815 provides specific requirements for classifying derivative as a hedge. Hedge accounting offsets the gain or loss on the hedged instrument. Hedges can be used to offset foreign currency exchange rate risk, interest rate risk and commodity risk. A derivative instrument in order to qualify as a hedge must have sufficient documentation at the beginning of the hedge term to identify the objective of the hedge. The hedge must be highly effective throughout its term. The effectiveness must be tested every three months and each time the financial instrument is prepared.

The net exposure to changes in exchange rate of pounds for dollars between November 1, 20X6 and March 1, 20X7.

a

Expert Solution

Answer to Problem 11.16AE

No net exposure from November 1, 20X6 and March 1, 20X7.

Explanation of Solution

Earning from Forward contract £30,000 × ($1.61 − $1.59)	$600
Less adjustment when inventory sold £30,000 × ($1.59 − $1.60)	($300)
Earning through revaluation £30,000 × ($1.59 − $1.60)	($300)
Net exposure	0

b

To determine

Introduction:

Derivatives designed as hedge: To reduce risks, ASC 815 provides specific requirements for classifying derivative as a hedge. Hedge accounting offsets the gain or loss on the hedged instrument. Hedges can be used to offset foreign currency exchange rate risk, interest rate risk and commodity risk. A derivative instrument in order to qualify as a hedge must have sufficient documentation at the beginning of the hedge term to identify the objective of the hedge. The hedge must be highly effective throughout its term. The effectiveness must be tested every three months and each time the financial instrument is prepared.

The entries for the purchase of inventory and forward contract during November 1, 20X6 through March 1, 20X7 Assuming fiscal year ends on December 31, 20X6

b

Expert Solution

Explanation of Solution

Date	Particulars	Debit $	Credit $
11/1/20X6	Foreign currency receivable from exchange broker	47,700
	Dollars payable to exchange broker		47,700
	(Entered into foreign exchange contract to manage foreign currency exposer)

12/31/20X6	Foreign currency receivable from exchange broker	900
	Foreign currency transaction gain		900
	(Revaluation of foreign currency receivable to end of period fair value)

12/31/X6	Foreign currency transaction loss	900
	Firm commitment		900
	(Record the loss on the financial instrument aspect of the firm commitment)

1/30/20X7	Foreign currency transaction loss	600
	Foreign currency receivable from exchange broker		600
	(Revaluation of foreign currency receivable to U.S. dollar equivalent)

	Firm commitment	600
	Foreign currency transaction gain		600
	(Recording of gain on the financial instrument aspect of the firm commitment)

	Purchases	47,400
	Firm commitment	300
	Accounts payable		47,700
	(Purchased and recognized foreign currency payable)

03/1/20X7	Foreign currency transaction loss	450
	Foreign currency receivable from exchange broker		450
	(Revaluation of foreign currency receivable)

	Accounts payable	150
	Foreign currency transaction gain		150
	(Revaluation of foreign currency payable)

	Dollars payable to exchange broker	47,700
	Cash		47,700
	(Delivery of dollars to exchange broker as per the exchange contract)

	Foreign currency unit (A$)	47,550
	Foreign currency receivable from exchange broker		47,550
	(Received £30,000 from exchange broker in accordance with contract)

Signed forward contract to manage foreign currency exposer

$47,700 = £30,000 × $1.59

Foreign currency transaction gain of revaluation of receivable

$900 = £30,000 × ($1.62 − $1.59)

Loss on firm commitment recognized

$900 = £30,000 × ($1.62 − $1.59)

Revaluation of foreign currency receivable to current U.S. dollar

$600 = £30,000 × ($1.60 − $1.62)

Recognized gain on the financial instrument aspect of firm commitment.

$600 = £30,000 × ($1.60 − $1.62)

Purchase of inventory committed

$47,700= £30,000 × $1.59 Jan 30 Spot

Revaluation of foreign currency receivable to fair value

$450 = £30,000 × ($1.585 − $1.60)

Revaluation of foreign currency payable with change in spot from $1.59 to $1.585

$150 = £30,000 × ($1.585 − $1.59)

Received £30,000 in exchange of U.S. dollar

$47,700= £30,000 × $1.59 Jan 30 Spot

Received £30,000 in exchange of U.S. dollar from exchange broker

$47,700= £30,000 × $1.585 Mar 1 Spot

£30,000 delivered to creditor.

c

To determine

Introduction:

Derivatives designed as hedge: To reduce risks, ASC 815 provides specific requirements for classifying derivative as a hedge. Hedge accounting offsets the gain or loss on the hedged instrument. Hedges can be used to offset foreign currency exchange rate risk, interest rate risk and commodity risk. A derivative instrument in order to qualify as a hedge must have sufficient documentation at the beginning of the hedge term to identify the objective of the hedge. The hedge must be highly effective throughout its term. The effectiveness must be tested every three months and each time the financial instrument is prepared.

The entries assuming that interest is significant and the time value of money is considered in valuing forward contract.

c

Expert Solution

Explanation of Solution

Date	Particulars	Debit $	Credit $
11/1/20X6	Foreign currency receivable from exchange broker	47,700
	Dollars payable to exchange broker		47,700
	(Entered into foreign exchange contract to manage foreign currency exposer)

12/31/X6	Foreign currency receivable from exchange broker	882
	Foreign currency transaction gain		882
	(Revaluation of foreign currency receivable)

	Foreign currency transaction loss	882
	Accounts payable		882
	(Revaluation of foreign currency payable)

01/30/20X7	Foreign currency transaction loss	585
	Foreign currency receivable from exchange broker		585
	(Revaluation of foreign currency receivable recognized )

	Firm commitment	585
	Foreign currency transaction gain		585
	(Gain on financial instrument aspect of the firm commitment recognized)

	Purchases	47,403
	Firm commitment	297
	Accounts payable		47,700
	(Accounts payable in foreign currency recognized)

3/1/20X7	Foreign currency transaction loss	447
	Foreign currency receivable from exchange broker		447
	(Revaluation of foreign currency receivable to fair value)

	Accounts payable	150
	Foreign currency transaction gain		150
	(Revaluation of foreign currency payable to equivalent U.S. dollars)

	Dollars payable to exchange broker	47,700
	Cash		47,700
	(Delivery of dollars to exchange broker as per the exchange contract)

	Foreign currency unit (A$)	47,550
	Foreign currency receivable from exchange broker		47,550
	(Received £30,000 from exchange broker in accordance with contract)

	Accounts payable	47,550
	Foreign currency Units		47,550
	(Foreign currency unit paid to creditor)

Signed forward contract to manage foreign currency exposer

$60,900 = £30,000 × $1.59

Revaluation of foreign currency receivable to discounted end of period fair value:

Gain on foreign currency transaction £30,000 × ($1.62 −$1.59)	$900
Adjustment of discount ($900 × .12) ×212	($18)
Discounted gains	$882

Revaluation of foreign currency receivable to current U.S. dollar equivalent:

Gain on foreign currency receivable £30,000 × ($1.60 −$1.59)	$300
Adjustment of discount ($300 × .12) ×112	($3)
Discounted gains	$297
Less: gain recognized previously	(882)
Net change in fair value	($585)

Purchase of inventory valued at spot rate $47,700 = £30,000 × $1.59
Revaluation of foreign currency receivable to current U.S. dollar and recognized:

Undiscounted loss on forward contract £30,000 × ($1.585 −$1.59)	($150)
Less: previously recognized net gain	($297)
Loss for the period	$447

Revaluation of foreign currency payable equivalent to U.S. dollars

$150 = £30,000 × ($1.585 −$1.59)

Purchase of inventory commitment met

$47,700 =£30,000 × $1.59

Received £30,000 from exchange broker in accordance with forward contract

$47,550 =£30,000 × $1.585 Mar 1 Spot rate

£30,000 delivered to creditor.

Answer 6

Chapter 11, Problem 11.16AE

a

To determine

Introduction:

Derivatives designed as hedge: To reduce risks, ASC 815 provides specific requirements for classifying derivative as a hedge. Hedge accounting offsets the gain or loss on the hedged instrument. Hedges can be used to offset foreign currency exchange rate risk, interest rate risk and commodity risk. A derivative instrument in order to qualify as a hedge must have sufficient documentation at the beginning of the hedge term to identify the objective of the hedge. The hedge must be highly effective throughout its term. The effectiveness must be tested every three months and each time the financial instrument is prepared.

The net exposure to changes in exchange rate of pounds for dollars between November 1, 20X6 and March 1, 20X7.

a

Expert Solution

Answer to Problem 11.16AE

No net exposure from November 1, 20X6 and March 1, 20X7.

Explanation of Solution

Earning from Forward contract £30,000 × ($1.61 − $1.59)	$600
Less adjustment when inventory sold £30,000 × ($1.59 − $1.60)	($300)
Earning through revaluation £30,000 × ($1.59 − $1.60)	($300)
Net exposure	0

Answer 7

Chapter 11, Problem 11.16AE

a

To determine

Introduction:

Derivatives designed as hedge: To reduce risks, ASC 815 provides specific requirements for classifying derivative as a hedge. Hedge accounting offsets the gain or loss on the hedged instrument. Hedges can be used to offset foreign currency exchange rate risk, interest rate risk and commodity risk. A derivative instrument in order to qualify as a hedge must have sufficient documentation at the beginning of the hedge term to identify the objective of the hedge. The hedge must be highly effective throughout its term. The effectiveness must be tested every three months and each time the financial instrument is prepared.

The net exposure to changes in exchange rate of pounds for dollars between November 1, 20X6 and March 1, 20X7.

Answer 8

a

Expert Solution

Answer to Problem 11.16AE

No net exposure from November 1, 20X6 and March 1, 20X7.

Answer 9

a

Expert Solution

Answer 10

a

Expert Solution

Answer 11

Expert Solution

Answer 12

Explanation of Solution

Earning from Forward contract £30,000 × ($1.61 − $1.59)	$600
Less adjustment when inventory sold £30,000 × ($1.59 − $1.60)	($300)
Earning through revaluation £30,000 × ($1.59 − $1.60)	($300)
Net exposure	0

Answer 13

b

To determine

Introduction:

Derivatives designed as hedge: To reduce risks, ASC 815 provides specific requirements for classifying derivative as a hedge. Hedge accounting offsets the gain or loss on the hedged instrument. Hedges can be used to offset foreign currency exchange rate risk, interest rate risk and commodity risk. A derivative instrument in order to qualify as a hedge must have sufficient documentation at the beginning of the hedge term to identify the objective of the hedge. The hedge must be highly effective throughout its term. The effectiveness must be tested every three months and each time the financial instrument is prepared.

The entries for the purchase of inventory and forward contract during November 1, 20X6 through March 1, 20X7 Assuming fiscal year ends on December 31, 20X6

b

Expert Solution

Explanation of Solution

Date	Particulars	Debit $	Credit $
11/1/20X6	Foreign currency receivable from exchange broker	47,700
	Dollars payable to exchange broker		47,700
	(Entered into foreign exchange contract to manage foreign currency exposer)

12/31/20X6	Foreign currency receivable from exchange broker	900
	Foreign currency transaction gain		900
	(Revaluation of foreign currency receivable to end of period fair value)

12/31/X6	Foreign currency transaction loss	900
	Firm commitment		900
	(Record the loss on the financial instrument aspect of the firm commitment)

1/30/20X7	Foreign currency transaction loss	600
	Foreign currency receivable from exchange broker		600
	(Revaluation of foreign currency receivable to U.S. dollar equivalent)

	Firm commitment	600
	Foreign currency transaction gain		600
	(Recording of gain on the financial instrument aspect of the firm commitment)

	Purchases	47,400
	Firm commitment	300
	Accounts payable		47,700
	(Purchased and recognized foreign currency payable)

03/1/20X7	Foreign currency transaction loss	450
	Foreign currency receivable from exchange broker		450
	(Revaluation of foreign currency receivable)

	Accounts payable	150
	Foreign currency transaction gain		150
	(Revaluation of foreign currency payable)

	Dollars payable to exchange broker	47,700
	Cash		47,700
	(Delivery of dollars to exchange broker as per the exchange contract)

	Foreign currency unit (A$)	47,550
	Foreign currency receivable from exchange broker		47,550
	(Received £30,000 from exchange broker in accordance with contract)

Signed forward contract to manage foreign currency exposer

$47,700 = £30,000 × $1.59

Foreign currency transaction gain of revaluation of receivable

$900 = £30,000 × ($1.62 − $1.59)

Loss on firm commitment recognized

$900 = £30,000 × ($1.62 − $1.59)

Revaluation of foreign currency receivable to current U.S. dollar

$600 = £30,000 × ($1.60 − $1.62)

Recognized gain on the financial instrument aspect of firm commitment.

$600 = £30,000 × ($1.60 − $1.62)

Purchase of inventory committed

$47,700= £30,000 × $1.59 Jan 30 Spot

Revaluation of foreign currency receivable to fair value

$450 = £30,000 × ($1.585 − $1.60)

Revaluation of foreign currency payable with change in spot from $1.59 to $1.585

$150 = £30,000 × ($1.585 − $1.59)

Received £30,000 in exchange of U.S. dollar

$47,700= £30,000 × $1.59 Jan 30 Spot

Received £30,000 in exchange of U.S. dollar from exchange broker

$47,700= £30,000 × $1.585 Mar 1 Spot

£30,000 delivered to creditor.

Answer 14

b

To determine

Introduction:

Derivatives designed as hedge: To reduce risks, ASC 815 provides specific requirements for classifying derivative as a hedge. Hedge accounting offsets the gain or loss on the hedged instrument. Hedges can be used to offset foreign currency exchange rate risk, interest rate risk and commodity risk. A derivative instrument in order to qualify as a hedge must have sufficient documentation at the beginning of the hedge term to identify the objective of the hedge. The hedge must be highly effective throughout its term. The effectiveness must be tested every three months and each time the financial instrument is prepared.

The entries for the purchase of inventory and forward contract during November 1, 20X6 through March 1, 20X7 Assuming fiscal year ends on December 31, 20X6

Answer 15

b

Expert Solution

Explanation of Solution

Date	Particulars	Debit $	Credit $
11/1/20X6	Foreign currency receivable from exchange broker	47,700
	Dollars payable to exchange broker		47,700
	(Entered into foreign exchange contract to manage foreign currency exposer)

12/31/20X6	Foreign currency receivable from exchange broker	900
	Foreign currency transaction gain		900
	(Revaluation of foreign currency receivable to end of period fair value)

12/31/X6	Foreign currency transaction loss	900
	Firm commitment		900
	(Record the loss on the financial instrument aspect of the firm commitment)

1/30/20X7	Foreign currency transaction loss	600
	Foreign currency receivable from exchange broker		600
	(Revaluation of foreign currency receivable to U.S. dollar equivalent)

	Firm commitment	600
	Foreign currency transaction gain		600
	(Recording of gain on the financial instrument aspect of the firm commitment)

	Purchases	47,400
	Firm commitment	300
	Accounts payable		47,700
	(Purchased and recognized foreign currency payable)

03/1/20X7	Foreign currency transaction loss	450
	Foreign currency receivable from exchange broker		450
	(Revaluation of foreign currency receivable)

	Accounts payable	150
	Foreign currency transaction gain		150
	(Revaluation of foreign currency payable)

	Dollars payable to exchange broker	47,700
	Cash		47,700
	(Delivery of dollars to exchange broker as per the exchange contract)

	Foreign currency unit (A$)	47,550
	Foreign currency receivable from exchange broker		47,550
	(Received £30,000 from exchange broker in accordance with contract)

Signed forward contract to manage foreign currency exposer

$47,700 = £30,000 × $1.59

Foreign currency transaction gain of revaluation of receivable

$900 = £30,000 × ($1.62 − $1.59)

Loss on firm commitment recognized

$900 = £30,000 × ($1.62 − $1.59)

Revaluation of foreign currency receivable to current U.S. dollar

$600 = £30,000 × ($1.60 − $1.62)

Recognized gain on the financial instrument aspect of firm commitment.

$600 = £30,000 × ($1.60 − $1.62)

Purchase of inventory committed

$47,700= £30,000 × $1.59 Jan 30 Spot

Revaluation of foreign currency receivable to fair value

$450 = £30,000 × ($1.585 − $1.60)

Revaluation of foreign currency payable with change in spot from $1.59 to $1.585

$150 = £30,000 × ($1.585 − $1.59)

Received £30,000 in exchange of U.S. dollar

$47,700= £30,000 × $1.59 Jan 30 Spot

Received £30,000 in exchange of U.S. dollar from exchange broker

$47,700= £30,000 × $1.585 Mar 1 Spot

£30,000 delivered to creditor.

Answer 16

b

Expert Solution

Answer 17

b

Expert Solution

Answer 18

Expert Solution

Answer 19

c

To determine

Introduction:

Derivatives designed as hedge: To reduce risks, ASC 815 provides specific requirements for classifying derivative as a hedge. Hedge accounting offsets the gain or loss on the hedged instrument. Hedges can be used to offset foreign currency exchange rate risk, interest rate risk and commodity risk. A derivative instrument in order to qualify as a hedge must have sufficient documentation at the beginning of the hedge term to identify the objective of the hedge. The hedge must be highly effective throughout its term. The effectiveness must be tested every three months and each time the financial instrument is prepared.

The entries assuming that interest is significant and the time value of money is considered in valuing forward contract.

c

Expert Solution

Explanation of Solution

Date	Particulars	Debit $	Credit $
11/1/20X6	Foreign currency receivable from exchange broker	47,700
	Dollars payable to exchange broker		47,700
	(Entered into foreign exchange contract to manage foreign currency exposer)

12/31/X6	Foreign currency receivable from exchange broker	882
	Foreign currency transaction gain		882
	(Revaluation of foreign currency receivable)

	Foreign currency transaction loss	882
	Accounts payable		882
	(Revaluation of foreign currency payable)

01/30/20X7	Foreign currency transaction loss	585
	Foreign currency receivable from exchange broker		585
	(Revaluation of foreign currency receivable recognized )

	Firm commitment	585
	Foreign currency transaction gain		585
	(Gain on financial instrument aspect of the firm commitment recognized)

	Purchases	47,403
	Firm commitment	297
	Accounts payable		47,700
	(Accounts payable in foreign currency recognized)

3/1/20X7	Foreign currency transaction loss	447
	Foreign currency receivable from exchange broker		447
	(Revaluation of foreign currency receivable to fair value)

	Accounts payable	150
	Foreign currency transaction gain		150
	(Revaluation of foreign currency payable to equivalent U.S. dollars)

	Dollars payable to exchange broker	47,700
	Cash		47,700
	(Delivery of dollars to exchange broker as per the exchange contract)

	Foreign currency unit (A$)	47,550
	Foreign currency receivable from exchange broker		47,550
	(Received £30,000 from exchange broker in accordance with contract)

	Accounts payable	47,550
	Foreign currency Units		47,550
	(Foreign currency unit paid to creditor)

Signed forward contract to manage foreign currency exposer

$60,900 = £30,000 × $1.59

Revaluation of foreign currency receivable to discounted end of period fair value:

Gain on foreign currency transaction £30,000 × ($1.62 −$1.59)	$900
Adjustment of discount ($900 × .12) ×212	($18)
Discounted gains	$882

Revaluation of foreign currency receivable to current U.S. dollar equivalent:

Gain on foreign currency receivable £30,000 × ($1.60 −$1.59)	$300
Adjustment of discount ($300 × .12) ×112	($3)
Discounted gains	$297
Less: gain recognized previously	(882)
Net change in fair value	($585)

Purchase of inventory valued at spot rate $47,700 = £30,000 × $1.59
Revaluation of foreign currency receivable to current U.S. dollar and recognized:

Undiscounted loss on forward contract £30,000 × ($1.585 −$1.59)	($150)
Less: previously recognized net gain	($297)
Loss for the period	$447

Revaluation of foreign currency payable equivalent to U.S. dollars

$150 = £30,000 × ($1.585 −$1.59)

Purchase of inventory commitment met

$47,700 =£30,000 × $1.59

Received £30,000 from exchange broker in accordance with forward contract

$47,550 =£30,000 × $1.585 Mar 1 Spot rate

£30,000 delivered to creditor.

Answer 20

c

To determine

Introduction:

Derivatives designed as hedge: To reduce risks, ASC 815 provides specific requirements for classifying derivative as a hedge. Hedge accounting offsets the gain or loss on the hedged instrument. Hedges can be used to offset foreign currency exchange rate risk, interest rate risk and commodity risk. A derivative instrument in order to qualify as a hedge must have sufficient documentation at the beginning of the hedge term to identify the objective of the hedge. The hedge must be highly effective throughout its term. The effectiveness must be tested every three months and each time the financial instrument is prepared.

The entries assuming that interest is significant and the time value of money is considered in valuing forward contract.

Answer 21

c

Expert Solution

Explanation of Solution

Date	Particulars	Debit $	Credit $
11/1/20X6	Foreign currency receivable from exchange broker	47,700
	Dollars payable to exchange broker		47,700
	(Entered into foreign exchange contract to manage foreign currency exposer)

12/31/X6	Foreign currency receivable from exchange broker	882
	Foreign currency transaction gain		882
	(Revaluation of foreign currency receivable)

	Foreign currency transaction loss	882
	Accounts payable		882
	(Revaluation of foreign currency payable)

01/30/20X7	Foreign currency transaction loss	585
	Foreign currency receivable from exchange broker		585
	(Revaluation of foreign currency receivable recognized )

	Firm commitment	585
	Foreign currency transaction gain		585
	(Gain on financial instrument aspect of the firm commitment recognized)

	Purchases	47,403
	Firm commitment	297
	Accounts payable		47,700
	(Accounts payable in foreign currency recognized)

3/1/20X7	Foreign currency transaction loss	447
	Foreign currency receivable from exchange broker		447
	(Revaluation of foreign currency receivable to fair value)

	Accounts payable	150
	Foreign currency transaction gain		150
	(Revaluation of foreign currency payable to equivalent U.S. dollars)

	Dollars payable to exchange broker	47,700
	Cash		47,700
	(Delivery of dollars to exchange broker as per the exchange contract)

	Foreign currency unit (A$)	47,550
	Foreign currency receivable from exchange broker		47,550
	(Received £30,000 from exchange broker in accordance with contract)

	Accounts payable	47,550
	Foreign currency Units		47,550
	(Foreign currency unit paid to creditor)

Signed forward contract to manage foreign currency exposer

$60,900 = £30,000 × $1.59

Revaluation of foreign currency receivable to discounted end of period fair value:

Gain on foreign currency transaction £30,000 × ($1.62 −$1.59)	$900
Adjustment of discount ($900 × .12) ×212	($18)
Discounted gains	$882

Revaluation of foreign currency receivable to current U.S. dollar equivalent:

Gain on foreign currency receivable £30,000 × ($1.60 −$1.59)	$300
Adjustment of discount ($300 × .12) ×112	($3)
Discounted gains	$297
Less: gain recognized previously	(882)
Net change in fair value	($585)

Purchase of inventory valued at spot rate $47,700 = £30,000 × $1.59
Revaluation of foreign currency receivable to current U.S. dollar and recognized:

Undiscounted loss on forward contract £30,000 × ($1.585 −$1.59)	($150)
Less: previously recognized net gain	($297)
Loss for the period	$447

Revaluation of foreign currency payable equivalent to U.S. dollars

$150 = £30,000 × ($1.585 −$1.59)

Purchase of inventory commitment met

$47,700 =£30,000 × $1.59

Received £30,000 from exchange broker in accordance with forward contract

$47,550 =£30,000 × $1.585 Mar 1 Spot rate

£30,000 delivered to creditor.

Answer 22

c

Expert Solution

Answer 23

c

Expert Solution

Answer 24

Expert Solution

Answer 25

Ch. 11 - Prob. 11.1Q Ch. 11 - Prob. 11.2Q Ch. 11 - The U.S. dollar strengthened against the European...Ch. 11 - Prob. 11.4Q Ch. 11 - Prob. 11.5Q Ch. 11 - How are assets and liabilities denominated in a...Ch. 11 - Prob. 11.7Q Ch. 11 - Prob. 11.8Q Ch. 11 - Prob. 11.9Q Ch. 11 - Distinguish between an exposed net asset position...

Answer to Problem 11.16AE

Explanation of Solution

Explanation of Solution

Explanation of Solution

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