International Accounting
International Accounting
5th Edition
ISBN: 9781260466492
Author: Doupnik, Timothy
Publisher: MCGRAW-HILL HIGHER EDUCATION
bartleby

Concept explainers

bartleby

Videos

Question
Book Icon
Chapter 6, Problem 18EP

a.

To determine

To record journal entries of sale and forward contract.

a.

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

($)

10/01/Y1Accounts receivable 6,900 
       Sales  6,900
 (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 revenues are increased. Hence, sales are credited.

To record foreign exchange gain:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/31/Y1Accounts receivable 200 
       Foreign exchange gain  200
 (to record foreign exchange gain)   

Table (2)

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

To record loss on forward contract:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/31/Y1Loss on forward contract 891.09 
       Forward contract  891.09
 (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, forward contract is a liability and liabilities are increased. Hence, Forward contract is credited.

To record foreign exchange gain:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

1/31/Y2Accounts receivable 100 
       Foreign exchange gain  100
 (to record foreign exchange gain)   

Table (4)

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

To record gain on forward contract:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

1/31/Y2Forward contract 191.09 
       Gain on forward contract  191.09
 (to record gain on forward contract)   

Table (5)

  • Since, Forward contract is a liability and liabilities are decreased. Hence, Forward contract is debited.
  • Since, gain on forward contract is a gain and gains are increased. Hence, gain on forward contract is credited.

To record account receivable:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

4/30/Y2Foreign currency 7,200 
       Accounts receivable  7,200
 (to record accounts receivable)   

Table (6)

  • 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 6,500 
Forward contract 700 
       Foreign currency  7,200
 (to record cash received)   

Table (7)

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

Computation of impact on net income is below:

The formula to calculate net income is:

Netincome=Sales+Income+GainsExpenseLoss

Substitute $6,900 for sales, $300 for income, $191.09 for gain and $891.09 for loss in the above formula.

Netincome=$6,900+$300+$191.09$891.09=$6,500

Thus, net income is increased by $6,500.

Working Note:

Computation of sale in USD:

Sales(inUSD)=Salevalue(inrupee)×USDperrupee=100,000×$0.069=$6,900

Computation of foreign exchange gain in USD:

Foreignexchangegain=Difference×Salevalue=($0.071$0.069)×100,000=$200

Computation of loss on forward contract:

Loss on forward contract=Difference×Salevalue=($0.074$0.065)×100,000=$900

Presentvalueofloss=Presentvaluefactor×Loss=0.9901×900=$891.09

b.

To determine

To record journal entries of sale and forward contract.

b.

Expert Solution
Check Mark

Explanation of Solution

Sales agreement and forward contract are both executor contract so, there is no entry for both.

To record loss on forward contract:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/31/Y1Loss on forward contract 891.09 
       Forward contract  891.09
 (to record loss on forward contract)   

Table (8)

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

To record gain on firm commitment:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/31/Y1Firm commitment 891.09 
       Gain on firm commitment  891.09
 (to record gain on form commitment)   

Table (9)

  • Since, firm commitment is a liability and liabilities are decreased. Hence, firm commitment is debited.
  • Since, gain on firm commitment is a gain and gains are increased. Hence, gain on firm commitment account is credited.

To record gain on forward contract:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

1/31/Y2Forward contract 191.09 
       Gain on forward contract  191.09
 (to record gain on forward contract)   

Table (10)

  • Since, forward contract is a liability and liabilities are decreased. Hence, Forward contract is debited.
  • Since, gain on forward contract is a gain and gains are increased. Hence, gain on forward contract is credited.

To record loss on firm commitment:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/31/Y1Loss on firm commitment 191.09 
       Firm commitment  191.09
 (to record loss on firm commitment)   

Table (11)

  • Since, loss on firm commitment is a loss and losses are increased. Hence, loss on firm commitment account is debited.
  • Since, firm commitment is a liability and liabilities are increased. Hence, firm commitment is credited.

To record sales:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

4/30/Y2Foreign currency 7,200 
       Sales  7,200
 (to record sales)   

Table (12)

  • Since, foreign currency is an asset and assets are increased. Hence, foreign currency is debited.
  • Since, sales are revenue and revenues are increased. Hence, sales account is credited.

To record cash received:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/31/Y1Cash 6,500 
Forward contract 700 
       Foreign currency  7,200
 (to record accounts receivable)   

Table (13)

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

To record adjustment to net income:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/31/Y1Adjustment to net income 700 
       Firm commitment  700
 (to record adjustment to net income)   

Table (14)

  • Since, adjustment to net income is revenue and revenue is decreased. Hence adjustment to net income is debited.
  • Since, firm commitment is a liability and liabilities are increased. Hence, firm commitment is credited.

Computation of impact on net income is below:

The formula to calculate net income is,

Netincome=Sales+Income+GainsExpenseLoss

Substitute $7,200 for sales, $700 for gain and $700 and $700 for loss in the above formula.

Netincome=$7,200+$700$700$700=$6,500

Thus, net income is increased by $6,500

Working Note:

Computation of sale in USD:

Sales(inUSD)=Salevalue(inrupee)×USDperrupee=100,000×$0.072=$7,200

Computation of loss on forward contract:

Loss on forward contract=Difference×Salevalue=($0.074$0.065)×100,000=$900

Presentvalueofloss=Presentvaluefactor×Loss=0.9901×900=$891.09

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Chapter 6 Solutions

International Accounting

Knowledge Booster
Background pattern image
Accounting
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Recommended textbooks for you
Text book image
FINANCIAL ACCOUNTING
Accounting
ISBN:9781259964947
Author:Libby
Publisher:MCG
Text book image
Accounting
Accounting
ISBN:9781337272094
Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:Cengage Learning,
Text book image
Accounting Information Systems
Accounting
ISBN:9781337619202
Author:Hall, James A.
Publisher:Cengage Learning,
Text book image
Horngren's Cost Accounting: A Managerial Emphasis...
Accounting
ISBN:9780134475585
Author:Srikant M. Datar, Madhav V. Rajan
Publisher:PEARSON
Text book image
Intermediate Accounting
Accounting
ISBN:9781259722660
Author:J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:McGraw-Hill Education
Text book image
Financial and Managerial Accounting
Accounting
ISBN:9781259726705
Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:McGraw-Hill Education
Foreign Exchange Risks; Author: Kaplan UK;https://www.youtube.com/watch?v=ne1dYl3WifM;License: Standard Youtube License