a
Introduction:
Forward Exchange Contract: A forward exchange contract shows exchange rates for selected major international currencies for one month, three months, and six months forward contracts. An active dealer market is available for companies willing to transact in foreign currencies. The forward rate on a date is not the same as the spot rate, the difference between the spot and the forward rate is known as the spread. The spread gives information about the strength or weakness of currencies.
The entries recorded by M’s foreign currency activities during 20X5 and 20X6.
a
Explanation of Solution
Date | Particular | Debit $ | Credit $ |
03/01/X5 | Dollars receivable from broker | 19,200 | |
Foreign currency payable to exchange broker | 19,200 | ||
(Signed a forward exchange contract for 90 days) | |||
5/30/X5 | Foreign currency transaction loss | 1,200 | |
Foreign currency payable to exchange broker | 1,200 | ||
(Exchange transaction loss recognized on revaluation of payable) | |||
Foreign currency payable to exchange broker | 20,400 | ||
Foreign currency units | 20,400 | ||
(Foreign currency payable recognized) | |||
Cash | 19,200 | ||
Dollars receivable from exchange broker | 19,200 | ||
(Cash received from exchange broker) |
- Foreign currency receivable from broker
- Revaluation of accounts payable to current U.S. dollars
- Foreign currency payable to exchange broker recognized
- Dollars received from exchange broker $19,200
$20,400 | |
($19,200) | |
Foreign currency transaction loss | $1,200 |
b
Introduction:
Forward Exchange Contract: A forward exchange contract shows exchange rates for selected major international currencies for one month, three months, and six months forward contracts. An active dealer market is available for companies willing to transact in foreign currencies. The forward rate on a date is not the same as the spot rate, the difference between the spot and the forward rate is known as the spread. The spread gives information about the strength or weakness of currencies.
The amount of foreign currency transaction gain or loss M would report on its income statement in 20X5 in Part I and II are combined
b
Answer to Problem 11.23.2P
Net loss in 20X5 $1,100
Explanation of Solution
Computation of foreign exchange transaction loss 20X5
Gain $ | Loss $ | |
Transaction 1: May 30 Part I | 900 | |
May 30 Part II | 1,200 | |
Transaction 2: August 30 Part II | 250 | 250 |
October 29 Part I | 1,000 | |
October 29 Part II | 250 | |
Transaction 3: December 31 Part I | 200 | |
December 31, Part II | 250 | |
Net loss | $1,100 |
Transaction 1.
Part I
Spot rate on March 1 C$1 = $0.65 and spot rate on May 30 C$1 = $0.68
Part II
Spot rate on March 1 C$1 = $0.64 and spot rate on May 30 C$1 = $0.68
Transaction 2.
Part I
Spot rate on July 1 ¥1 = $0.104 and spot rate on October 29 ¥1 = $0.106
Part II
Spot rate on July 1 ¥1 = $0.104 and spot rate on August 30 ¥1 = $0.1055
Forward rate on July 1 ¥1 = $0.105 and spot rate on August 30 ¥1 = $0.1055
Transaction 3:
Part I
Spot rate on November 16 £1 = $1.65 and spot rate on December 30 £1 = $1.63
Part II
Forward rate on November 16 £1 = $1.67 and spot rate on December 30 £1 = $1.645
c
Introduction:
Forward Exchange Contract: A forward exchange contract shows exchange rates for selected major international currencies for one month, three months, and six months forward contracts. An active dealer market is available for companies willing to transact in foreign currencies. The forward rate on a date is not the same as the spot rate, the difference between the spot and the forward rate is known as the spread. The spread gives information about the strength or weakness of currencies.
The amount of foreign currency transaction gain or loss M would report on its income statement in 20X6 in Part I and II are combined
c
Answer to Problem 11.23.2P
Net Loss in 20X6 $150
Explanation of Solution
Computation of foreign exchange transaction loss 20X6
Gain $ | Loss $ | |
Transaction 3 | ||
Part I January 15, 20X6 | - | 100 |
Part II January 15,20X6 | - | 50 |
Net loss | 150 |
Transaction 3:
Part I
Spot rate on November 16 £1 = $1.63 and spot rate on January 15 £1 = $1.64
Part II
Forward rate on December 31 £1 = $1.645 and spot rate on January 15 £1 = $1.640
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Chapter 11 Solutions
ADVANCED FINANCIAL ACCOUNTING-ACCESS
- 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 December 1, Y1, AAA, a US based company, entered into a three months forward contract to purchase 1 million foreign currency FC, on March 1, Y2. The following US per FC exchange rates apply: Date Spot Rate Forward Rate December 1, Y1 $0.088 $0.084 December 31, Y1 $ 0.080 $0.074 March 1, Y2 $0.076 AAA borrowing rate is 12%. The present value factor for 2 months at an annual rate is 0.9803. How would AAA report the forward contract on its balance sheet on December 31, Y1? Justify your answer and show your calculations. 3 pts As a liability of 9,803. 1,000,000 x (0.084-0.074) = 10,000 x 0.9803 = 9803arrow_forwardQuestion 35 Mint Corporation has several transactions with foreign entities. Each transaction is denominated in the local currency unit of the country in which the foreign entity is located. On November 2, 20X8, Mint sold confectionary items to a foreign company at a price of LCU 23,000 when the direct exchange rate was 1 LCU = $1.08. The account has not been settled as of December 31, 20X8, when the exchange rate has increased to 1 LCU = $1.10. The foreign exchange gain or loss on Mint's records at year-end for this transaction will be: $460 loss $387 loss $387 gain $460 gainarrow_forward
- An U.S. firm requires C$230,000 in 90 days to pay the imports from Canada. To avoid currency exchange rate risk, it needs to __________ A. purchase Canadian dollars (C$) 90 days from now at the spot rate B. obtain a 90-day forward sale contract on Canadian dollars (C$) C. obtain a 90-day forward purchase contract on Canadian dollars (C$) D. sell Canadian dollars (C$) 90 days from now at the spot ratearrow_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_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
- Peerless Corporation (a U.S. company) made a sale to a foreign customer on December 15, 20X1 for 125,000 crowns. It received payment on January 15, 20X2. The following exchange rates for 1 crown apply: December 15 $ 0.61 December 31 0.65 January 15 0.60 How does the fluctuation in exchange rates affect Peerless’s 20X1 income statement? $5,000 loss $5,000 gain $6,250 loss $6,250 gainarrow_forwardThe 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_forwardQuestion 15 Levin company entered into a forward contract to speculate in the foreign currency. It sold 100,000 foreign currency units under a contract dated November 1, 20X8, for delivery on January 31, 20X9: 11/1/20X8 12/31/20X8 Spot rates $ 0.035 $ 0.037 30-day forward rate 0.034 0.036 90-day forward rate 0.033 0.035 In its income statement for the year ended December 31, 20X8, what amount of loss should Levin report from this forward contract? $0 $300 $200 $100arrow_forward
- D&R A3 2-2 A Canadian corporation (ACC) has just entered into a two-year currency swap contract with Big Dealer Bank (BDB). The swap contract requires ACC to make semi-annual payments in Canadian dollars (C$) and receive semi-annual payments in U.S. dollars (US$). The notional amount in Canadian dollars is C$25 million. The accrual period for the swap is 180/360, assuming 360 days per year. The US$/C$ spot exchange rate is 0.77, with the Canadian dollar being the domestic currency for ACC. The term structures of C$ LIBOR and US$ LIBOR are as follows: Days C$ LIBOR (%) US$ LIBOR (%) 180 0.50 0.55 360 0.60 0.65 540 0.65 0.75 720 0.70 0.85 What is the fixed rate, in Canadian dollars?arrow_forwardOn March 1, 20x1, ABC Co. sold inventory to a foreign company for FC 1,000,000 (FC meansforeign currency) when the spot exchange rate is FC 40: ₱1. The payment is due on April 1, 20x1.ABC Co. is concerned about the possible fluctuation in exchange rates, so on this date, ABC Co.entered into a forward contract to sell FC 1,000,000 for ₱25,000 to a broker. According to the termsof the forward contract, if FC 1,000,000 is worth less than ₱25,000 on April 1, 20x1, ABC Co. shallreceive from the broker the difference; if it is worth more than ₱25,000, ABC Co. shall pay the brokerthe difference. If the exchange rate on April 1, 20x1 is FC35: ₱1, how much is the net cash settlement? a. 3,571 receipt b. 3,571 payment c. 4,231 receipt d. 4,231 paymentarrow_forwardD&R A3 2 - 5 A Canadian corporation (ACC) has just entered into a two-year currency swap contract with Big Dealer Bank (BDB). The swap contract requires ACC to make semi-annual payments in Canadian dollars (C$) and receive semi-annual payments in U.S. dollars (US$). The notional amount in Canadian dollars is C$25 million. The accrual period for the swap is 180/360, assuming 360 days per year. The US$/C$ spot exchange rate is 0.77, with the Canadian dollar being the domestic currency for ACC. The term structures of C$ LIBOR and US$ LIBOR are as follows: Days C$ LIBOR (%) US$ LIBOR (%) 180 0.50 0.55 360 0.60 0.65 540 0.65 0.75 720 0.70 0.85 240 days has passed since the initiation of the currency swap contract. The new exchange rate is US$0.85/C$. Day 180, the 180-day C$ and U.S.$ LIBORs remained the same, at 0.5% and 0.55%, respectively. LIBOR term structures at time 240: Days C$ LIBOR (%) US$ LIBOR (%) 120 0.60 0.60…arrow_forward