![EBK ADVANCED FINANCIAL ACCOUNTING](https://www.bartleby.com/isbn_cover_images/8220102796096/8220102796096_largeCoverImage.jpg)
a.
Introduction: A contract or agreement laid between two parties for buying and selling of an asset at a specific rate and on a specific future date is known as forward contract. This is a contract or an agreement between a buyer and a seller to trade an asset at a future date whose price is set when contract is drawn and such agreements settle at the end of the contract on that specific date.
To prepare:
a.
![Check Mark](/static/check-mark.png)
Explanation of Solution
Use of forward contract to manage the foreign currency risk of exposed foreign currency position, not designated as a hedge.
-Purchase of furniture - Settle forward exchange
resulting in foreign contract and receive
currency payable 100,000 Australian
Dollars
-Sign foreign exchange - Pay foreign currency
contract to receive payable
Australian Dollars on
March 31st
Forward Rate:
A$1 = $0.609 A$1 = $0.612
Spot Rate:
A$1 = $0.600 A$1 = $0.610 A$1 = $ 0.602
Journal entries in the books of M CompFor the year Dec 31st20X1 | |||
Date | Particulars | Debit$ | Credit$ |
Inventory | 60,000 | ||
Dec 1st | Accounts Payable (1) | 60,000 | |
20X1 | (To record Accounts payable.) | ||
Foreign Currency receivable from Exchange Broker (A$) | 60,900 | ||
Dollars Payable to Exchange Broker (2) | 60,900 | ||
(To record forward contract to manage foreign currency risk.) | |||
Dec 31st | Foreign Currency Transaction Loss (3) | 1,000 | |
20X1 | Accounts Payable (A$) | 1,000 | |
(To record foreign currency transaction loss.) | |||
Foreign currency receivable from exchange broker (A$) (4) | 300 | ||
Foreign currency transaction gain | 300 | ||
(To record foreign currency transaction gain.) |
Journal Entries in the books of M CompFor the year Dec 31st20X2 | |||
Date | Particulars | Debit$ | Credit$ |
Foreign Currency Transaction Loss (5) | 1,000 | ||
March 31st | Foreign Currency receivable from Exchange Broker (A$) | 1,000 | |
20X2 | (To record revalue of foreign currency receivable.) | ||
Account Payable (A$) (6) | 800 | ||
Foreign currency transaction gain | 800 | ||
(To record revalue of foreign currency payable.) | |||
Dollars payable to Exchange broker | 60,900 | ||
Cash | 60,900 | ||
(To record cash payment required by forward contract.) | |||
Foreign Currency Units (A$) | 60,200 | ||
Foreign currency receivable from exchange broker (A$) | 60,200 | ||
Accounts Payables (A$) | 60,200 | ||
Foreign Currency Units (A$) | 60,200 | ||
(To record payment to creditor.) |
Working Notes:
1.Accounts Payable =
2.Foreign currency receivable =
6.Accounts Payable =
b.
Introduction: A contract or agreement laid between two parties for buying and selling of an asset at a specific rate and on a specific future date is known as forward contract. This is a contract or an agreement between a buyer and a seller to trade an asset at a future date whose price is set when contract is drawn and such agreements settle at the end of the contract on that specific date.
To prepare: Journal entries for forward contract as fair value of hedge of foreign currency firm commitment.
b.
![Check Mark](/static/check-mark.png)
Explanation of Solution
-Sign foreign exchange -Purchase of furniture - Settle forward exchange
contract to hedge foreign resulting in foreign contract and receive
currency payable firm currency payable. 100,000 Australian
commitment dollars.
-Pay foreign currency
Forward Rate:
A$1 = $0.609 A$1 = $0.612 A$1 = $0.605
Spot Rate:
A$1 = $0.600 A$1 = $0.610 A$1 = $0.608A$1 = $ 0.602
Journal Entries in the books of M CompFor the year Dec 31st20X1 | |||
Date | Particulars | Debit$ | Credit$ |
Dec 1st | Foreign Currency receivable from Exchange Broker (A$) | 60,900 | |
20X1 | Dollars Payable to Exchange Broker (1) | 60,900 | |
(To record forward contract to manage foreign currency risk.) | |||
Dec 31st | Foreign currency receivable from exchange broker (A$) | 300 | |
20X1 | Foreign currency transaction gain (2) | 300 | |
(To record foreign currency transaction gain.) | |||
Foreign currency transaction loss (3) | 300 | ||
Firm commitment | 300 | ||
(To record the loss on the financial instrument.) |
Journal Entries in the books of M CompFor the year Dec 31st20X2 | |||
Date | Particulars | Debit$ | Credit$ |
Foreign Currency Transaction Loss (4) | 700 | ||
Jan 30th | Foreign Currency receivable from Exchange Broker (A$) | 700 | |
20X2 | (To record revalue of foreign currency receivable.) | ||
Firm commitment (5) | 700 | ||
Foreign currency transaction gain | 700 | ||
(To record the gain on the financialinstrument.) | |||
Inventory (purchases) | 61,200 | ||
Accounts payable (A$) (6) | 60,800 | ||
Firm Commitment | 400 | ||
(To record acquirement of furniture initially.) |
Journal Entries in the books of M CompFor the year Dec 31st20X2 | |||
Date | Particulars | Debit$ | Credit$ |
March 31st | Foreign Currency transaction loss (A$) (7) | 300 | |
20X2 | Foreign currency receivable from exchange broker (A$) | 300 | |
(To record revalue of foreign currency receivable.) | |||
Accounts Payable (A$) (8) | 600 | ||
Foreign currency transaction gain | 600 | ||
(To record revalue of foreign currency payable.) | |||
Dollars payable to exchange broker (A$) | 60,900 | ||
Cash | 60,900 | ||
(to record the delivery of US dollars to exchange broker.) | |||
Foreign Currency units (A$) (9) | 60,200 | ||
Foreign currency receivable from exchange broker (A$) | 60,200 | ||
(To record the delivery of US dollars from exchange broker.) | |||
Accounts Payable (A$) | 60,200 | ||
Foreign currency unit (A$) | 60,200 | ||
(To record the payment of A$ 100,000 to foreign creditor.) |
Working Notes:
1. Foreign currency receivable
=
3. Foreign currency transaction loss =
6.Accounts Payable =
8.Accounts Payable =
9 Foreign Currency Units =
c.
Introduction: A contract or agreement laid between two parties for buying and selling of an asset at a specific rate and on a specific future date is known as forward contract. This is a contract or an agreement between a buyer and a seller to trade an asset at a future date whose price is set when contract is drawn and such agreements settle at the end of the contract on that specific date.
To prepare: Journal entries for forward contract as cash flow hedge of
c.
![Check Mark](/static/check-mark.png)
Explanation of Solution
Use of forward contract as cash flow hedge of forecasted foreign currency transaction.
-Sign foreign exchange-Purchase of furniture - Settle forward exchange
Contract to hedge resulting in foreign contract and receive
Forecasted foreign Currency Payable 100,000 Australian
Currency transaction. Dollars.
- Pay foreign currency
payable.
Forward Rate:
A$1 = $0.609 A$1 = $0.612 A$1 = $0.605
Spot Rate:
A$1 = $0.600 A$1 = $0.610 A$1 = $0.608 A$1 = $ 0.602
Journal Entries in the books of M CompFor the year Dec 31st20X1 | |||
Date | Particulars | Debit$ | Credit$ |
Dec 1st | Foreign currency receivable from exchange broker (A$) | 60,900 | |
20X1 | Dollars payable to exchange broker | 60,900 | |
(To record forward contract to manage foreign currency risk | |||
Dec 31st | Foreign currency receivable from exchange broker (A$) | 300 | |
20X1 | Other comprehensive income | 300 | |
(To record OCI for effective portion of change in fair value) |
Journal Entries in the books of M CompFor the year Dec 31st20X2 | |||
Date | Particulars | Debit$ | Credit$ |
Other comprehensive income (OCI) | 700 | ||
Jan 30th | Foreign currency receivable from exchange broker (A$) | 700 | |
20X2 | (To record revalue of foreign currency receivable and OCI) | ||
Inventory (Purchases) | 60,800 | ||
Account payable (A$) | 60,800 | ||
(To record furniture acquired and value at spot rate) | |||
March 31st | Other comprehensive income | 300 | |
20X2 | Foreign currency receivable from exchange broker (A$) | 300 | |
(To record revalue of foreign currency and OCI) | |||
Accounts Payable (A$) | 600 | ||
Foreign currency transaction gain | 600 | ||
(To record change in current earning as specified by FASB 52) | |||
Foreign currency transaction loss | 600 | ||
Other comprehensive income | 600 | ||
(To record reclassify amount from OCI to offset foreign currency transaction gain) | |||
Dollars payable to exchange brokers (A$) | 60900 | ||
Cash | 60900 | ||
(To record the delivery of US dollars to exchange broker) | |||
Foreign currency units (A$) | 60200 | ||
Foreign currency receivable from exchange broker (A$) | 60200 | ||
(To receive $100,000 from broker in accordance with forward contract signed on December 1st) | |||
Accounts payable (A$) | 60200 | ||
Foreign currency units (A$) | 60200 | ||
(To deliver $100,000 to foreign creditor) |
Working Notes:
1. Foreign currency receivable =
A$ 100,000 × 0.612 (Spot Rate) 31st Dec 20X1 − $60,900
4.Accounts Payable =
7 Foreign Currency Units =
d.
Introduction: A contract or agreement laid between two parties for buying and selling of an asset at a specific rate and on a specific future date is known as forward contract. This is a contract or an agreement between a buyer and a seller to trade an asset at a future date whose price is set when contract is drawn and such agreements settle at the end of the contract on that specific date.
To prepare: Journal entries for forward contract used for speculative purpose only.
d.
![Check Mark](/static/check-mark.png)
Explanation of Solution
Use of forward contract for speculative purpose only
-Sign 120 day speculative - Settle forward exchange
Contract to purchasecontract and receive
100,000 Australian 100,000 Australian Dollar. Dollar.
Forward Rate:
A$1 = $0.609 A$1 = $0.612
Spot Rate:
A$1 = $0.600 A$1 = $0.610 A$1 = $ 0.602
Journal Entries in the books of M CompFor the year Dec 31st20X1 | |||
Date | Particulars | Debit$ | Credit$ |
Dec 1st | Foreign currency receivable from exchange broker (A$) | 60,900 | |
20X1 | Dollars payable to exchange broker | 60,900 | |
(To record 120 forward contracts for speculation) | |||
Dec 31st | Foreign currency receivable from exchange broker (A$) | 300 | |
20X1 | Foreign currency transaction gain | 300 | |
(To record foreign currency transaction gain) |
Journal Entries in the books of M CompFor the year Dec 31st20X2 | |||
Date | Particulars | Debit$ | Credit$ |
Foreign currency transaction loss | 1,000 | ||
March 31st | Foreign currency receivable from exchange broker (A$) | 1,000 | |
20X2 | (To record revalue of foreign currency receivable) | ||
Dollars payable to exchange broker | 60,900 | ||
Cash | 60,900 | ||
(To record delivery of US $ to forward exchange broker) | |||
Foreign currency units (A$) | 60,200 | ||
Foreign currency receivable from exchange broker (A$) | 60,200 | ||
(To receive A$ 100,000 from exchange broker) |
Working Notes:
- Foreign currency receivable =
7 Foreign Currency Units =
e.
Introduction: A contract or agreement laid between two parties for buying and selling of an asset at a specific rate and on a specific future date is known as forward contract. This is a contract or an agreement between a buyer and a seller to trade an asset at a future date whose price is set when contract is drawn and such agreements settle at the end of the contract on that specific date.
To prepare: Journal entries for forward contract to manage the foreign currency position, considering time value of money.
e.
![Check Mark](/static/check-mark.png)
Explanation of Solution
Use of forward contract to manage the exposed foreign currency positionconsidering the time value of money at a 12% annual rate. Forward contract not designed as a hedge.
-Purchase of Furniture - Settle forward exchange
resulting in Foreign contract and receive
currency payable. 100,000 Australian
Dollar.
-Sign hedging foreign - Pay foreign Currency
exchange contract to Payable
receive Australian Dollars
on March 31st.
Forward Rate:
A$1 = $0.609 A$1 = $0.612
Spot Rate:
A$1 = $0.600 A$1 = $0.610 A$1 = $ 0.602
Journal Entries in the books of M CompFor the year Dec 31st20X1 | |||
Date | Particulars | Debit$ | Credit$ |
Inventory (purchases) | 60,000 | ||
Dec 1st | Accounts payable (A$) | 60,000 | |
20X1 | (To record foreign currency payable) | ||
Foreign currency receivable from exchange broker (A$) | 60,900 | ||
Dollars payable to exchange broker | 60,900 | ||
(To record forward contract to hedge foreign currency) | |||
Dec 31st | Foreign currency transaction loss | 1,000 | |
20X1 | Accounts payable (A$) | 1,000 | |
(To record foreign currency transaction loss) | |||
Foreign currency receivable from exchange broker (A$) | 291 | ||
Foreign currency transaction gain | 291 | ||
(To record revalue of foreign currency receivable) |
Journal Entries in the books of M CompFor the year Dec 31st20X2 | |||
Date | Particulars | Debit$ | Credit$ |
Foreign currency transaction loss | 991 | ||
March 31st | Foreign currency receivable from exchange broker (A$) | 991 | |
20X2 | (To record revalue of foreign currency receivable) | ||
Account payable (A$) | 800 | ||
Foreign currency transaction gain | 800 | ||
(To record revalue of foreign currency payable) | |||
Dollars payable to exchange broker | 60,900 | ||
Cash | 60,900 | ||
(To record cash payment required by forward contract) | |||
Foreign currency units (A$) | 60,200 | ||
Foreign currency receivable from exchange broker (A$) | 60,200 | ||
(to receive $100,000 from exchange broker as per forward contract) | |||
Accounts payables (A$) | 60,200 | ||
Foreign currency units (A$) | 60,200 | ||
(To record payment to creditor) |
Working Notes:
1.Accounts Payable =
2. Foreign currency receivable =
3.Foreign currency transaction loss =
4.Foreign currency transaction Gain = Foreign currency receivable Dec 31st (forward rate) − foreign currency receivable Dec 1st (forward rate)
5 Foreign Currency Transaction Loss
6. Accounts Payable =
7 Foreign Currency Units =
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Chapter 11 Solutions
EBK ADVANCED FINANCIAL ACCOUNTING
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