International Accounting
International Accounting
5th Edition
ISBN: 9781260466492
Author: Doupnik, Timothy
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 6, Problem 14EP

a.

To determine

Record journal entries and determine effect on net income using cash flow hedge.

a.

Expert Solution
Check Mark

Explanation of Solution

Cash Flow Hedge:

Companies use cash flow hedge to minimize the variability in cash flows. It is used by the companies to minimize or eliminate the risk arising from change in the flow of cash.

To record sales:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/1/Y1Accounts receivable 20,000 
         Sales  20,000
 (to record sales)   

Table (1)

  • Since, accounts receivable is an asset and assets are increased. Hence, accounts receivable is debited.
  • Since, sales are revenue and revenue is increased. Hence, sales are credited.

No entry for forward contract

To record foreign exchange gain:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/31/Y1Accounts receivable 1,000 
         Foreign exchange gain  1,000
 (to record foreign exchange gain)   

Table (2)

  • Since, accounts receivable is an asset and assets are increased. Hence, accounts receivable are debited.
  • Foreign exchange gain is a gain and gains are increased. Hence, foreign exchange gain is credited.

To record loss on forward contract:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/31/Y1Loss on forward contract 1,000 
         AOCI  1,000
 (to record loss on forward contract)   

Table (3)

  • Since, loss on forward contract is a loss and losses are increased. Hence, loss on forward contract is debited.
  • Since, AOCI is a liability and liabilities are increased. Hence, AOCI is credited.

To record AOCI:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/31/Y1AOCI 1,176.36 
         Forward contract  1,176.36
 (to record AOCI)   

Table (4)

  • Since, AOCI is a liability and liabilities are decreased. Hence, AOCI is debited.
  • Since, forward contract is an asset and assets are decreased. Hence, forward contract is credited.

To record premium revenue:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/31/Y1AOCI 266.67 
         Premium revenue  266.67
 (to record premium revenue)   

Table (5)

  • Since, AOCI is a liability and liabilities are decreased. Hence, AOCI is debited.
  • Since, premium revenue is revenue and revenue is increased. Hence, premium revenue is credited.

To record foreign exchange gain

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

3/1/Y2Accounts receivable 1,400 
         Foreign exchange gain  1,400
 (to record foreign exchange gain)   

Table (6)

  • Since, accounts receivable is an asset and assets are increased. Hence, accounts receivable are debited.
  • Foreign exchange gain is a gain and gains are increased. Hence, foreign exchange gain is credited.

To record loss on forward contract:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

3/1/Y2Loss on forward contract 1,400 
         AOCI  1,400
 (to record loss on forward contract)   

Table (7)

  • Since, loss on forward contract is a loss and losses are increased. Hence, loss on forward contract is debited.
  • Since, AOCI is a liability and liabilities are increased. Hence, AOCI is credited.

To record AOCI:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

3/1/Y2AOCI 423.64 
         Forward contract  423.64
 (to record AOCI)   

Table (8)

  • Since, AOCI is a liability and liabilities are decreased. Hence, AOCI is debited.
  • Since, forward contract is an asset and assets are decreased. Hence, forward contract is credited.

To record premium revenue:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/31/Y1AOCI 533.33 
         Premium revenue  533.33
 (to record premium revenue)   

Table (9)

  • Since, AOCI is a liability and liabilities are decreased. Hence, AOCI is debited.
  • Since, premium revenue is revenue and revenue is increased. Hence, premium revenue is credited.

To record account receivable:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/31/Y1Foreign currency 22,400 
         Accounts receivable  22,400
 (to record accounts receivable)   

Table (10)

  • Since, foreign currency is an asset and assets are increased. Hence, foreign currency is debited.
  • Since, accounts receivable is an asset and asset is decreased. Hence, accounts receivable is credited.

To record cash received:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/31/Y1Cash 20,800 
Forward contract 1,600 
         Foreign currency  22,400
 (to record accounts receivable)   

Table (11)

  • Since, cash is an asset and assets are increased. Hence, cash account is debited.
  • Since, forward contract is an asset and assets are increased. Hence, forward contract is debited.
  • Since, foreign currency is an asset and assets are decreased. Hence, foreign currency is credited.

Impact on net income can be calculated as below:

For Year 1,

Netincome=Sales+Income+GainLoss

Substitute $20,000 for sales, $1,000 for income, $266.67 for gain and $1,000 for loss in the formula,

Netincome=$20,000+$1,000+$266.67$1,000=$20,266.67

For Year 2,

Netincome=Sales+Income+GainLoss

Substitute $0 for sales, $1,400 for income, $533.33 for gain and $1,400 for loss in the formula,

Netincome=$0+$1,400+$533.33$1,400=$533.33

Impact on income over both accounting period is $20,800 ($20,266.67+$533.33)

Working Note:

Conversion of sale from crown to USD

Sales(inUSD)=Salevalue(incrown)×USDpercrown=20,000×$1=$20,000

Computation of foreign exchange gain in USD:

Foreignexchangegain=Difference×Salevalue=($1.05$1.00)×$20,000=$1,000

Computation of net income of both accounting periods:

Netincome(Year1and2)=Netincome(Year1)+Netincome(Year2)=$20,266.67+$533.33=$20,800

b.

To determine

Record journal entries and determine effect on net income using fair value hedge.

b.

Expert Solution
Check Mark

Explanation of Solution

Fair Value Hedge:

If the fair value of an asset or a liability is affected by the change in exchange rate than it is called fair value hedge. If the fair value is not hedged, the fair value risk must affect the net income to meet the requirements for hedge accounting.

To record sales:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/1/Y1Accounts receivable 20,000 
         Sales  20,000
 (to record sales)   

Table (12)

  • Since, accounts receivable is an asset and assets are increased. Hence, accounts receivable is debited.
  • Since, sales are revenue and revenue is increased. Hence, sales are credited.

No entry for forward contract

To record foreign exchange gain:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/31/Y1Accounts receivable 1,000 
         Foreign exchange gain  1,000
 (to record foreign exchange gain)   

Table (13)

  • Since, accounts receivable is an asset and assets are increased. Hence, accounts receivable are debited.
  • Foreign exchange gain is a gain and gains are increased. Hence, foreign exchange gain is credited.

To record loss on forward contract:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/31/Y1Loss on forward contract 1176.36 
         Forward contract  1176.36
 (to record loss on forward contract)   

Table (14)

  • Since, loss on forward contract is a loss and losses are increased. Hence, loss on forward contract is debited.
  • Since, AOCI is a liability and liabilities are increased. Hence, AOCI is credited.

To record foreign exchange gain

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

3/1/Y2Accounts receivable 1,400 
         Foreign exchange gain  1,400
 (to record foreign exchange gain)   

Table (15)

  • Since, accounts receivable is an asset and assets are increased. Hence, accounts receivable are debited.
  • Foreign exchange gain is a gain and gains are increased. Hence, foreign exchange gain is credited.

To record loss on forward contract:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

3/1/Y2Loss on forward contract 423.64 
         AOCI  423.64
 (to record loss on forward contract)   

Table (16)

  • Since, loss on forward contract is a loss and losses are increased. Hence, loss on forward contract is debited.
  • Since, AOCI is a liability and liabilities are increased. Hence, AOCI is credited.

To record account receivable:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/31/Y1Foreign currency 22,400 
         Accounts receivable  22,400
 (to record accounts receivable)   

Table (17)

  • Since, foreign currency is an asset and assets are increased. Hence, foreign currency is debited.
  • Since, accounts receivable is an asset and assets are decreased. Hence, accounts receivable is credited.

To record cash received:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/31/Y1Cash 20,800 
Forward contract 1,600 
         Foreign currency  22,400
 (to record accounts receivable)   

Table (18)

  • Since, cash is an asset and assets are increased. Hence, cash account is debited.
  • Since, forward contract is an asset and assets are increased. Hence, forward contract is debited.
  • Since, foreign currency is an asset and assets are decreased. Hence, foreign currency is credited.

Impact on net income can be calculated below:

For Year 1,

Netincome=Sales+GainLoss

Substitute $20,000 for sales, $1,000 for gain and 1,176.36 for loss in the above formula.

Netincome=$20,000+$1,000$1,176.36=$19,823.64

For Year 2,

Netincome=Sales+GainLoss

Substitute $0 for sales, $1400 for gain and $423.64 for loss in the above formula.

Netincome=$0+$1,400$423.64=$976.36

Impact on income over both accounting period is $20,800.

Working Note:

Conversion of sale from crown to USD

Sales(inUSD)=Salevalue(incrown)×USDpercrown=20,000×$1=$20,000

Computation of foreign exchange gain in USD:

Foreignexchangegain=Difference×Salevalue=($1.05$1.00)×$20,000=$1,000

Computation of net income of both accounting periods:

Netincome(Year1and2)=Netincome(Year1)+Netincome(Year2)=$19,823.64+$976.36=$20,800

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Chapter 6 Solutions

International Accounting

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