Chapter 7, Problem 42P

a.

To determine

Prepare journal entries to account for import purchase without hedge.

Explanation of Solution

The journal entries to account for import purchase without hedge:

Date	Account Title and explanation	Post Ref.	Debit($)	Credit($)
10/1/17	Purchase		2,00,000
	Account Payable			2,00,000
	( To record purchase and account payable at spot rate)
12/31/17	Foreign exchange loss		10,000
	Account Payable			10,000
	(To adjust the account payable at spot rate on September 30 and record foreign exchange loss)
12/31/17	Foreign exchange loss		10,000
	Account Payable			10,000
	(To adjust the value of account payable and loss due to change in foreign exchange loss)
1/31/18	Account Payable		2,20,000
	Cash			2,20,000
	(To record the payment of  2,20,000 Euros)

Table: (1)

b.

To determine

Prepare journal entries to account for import purchase and foreign currency forward cash flow as fair value hedge.

Explanation of Solution

The journal entries to account for import purchase and foreign currency forward cash flow as fair value hedge:

Date	Account Title and explanation	Post Ref.	Debit($)	Credit($)
Sept-15	Purchase		2,00,000
	Account Payable			2,00,000
	( To record purchase of part on spot rate)
Sept-30	Foreign exchange loss		10,000
	Account Payable			10,000
	(To revalue the  foreign currency account payable and recognize the loss on and foreign exchange)
	Forward contract		5,940.6
	Gain on forward contract			5,940.6
	(To record the forward contract as an assets by taking interest rate of 12% ( 1% per month) is 0.9901)
Oct-31	Foreign exchange loss		10,000
	Account Payable			10,000
	(To revalue at spot rate as on 10/31)
	Forward contract		2059.4
	Gain on forward contract			2059.4
	(To adjust the carrying value as forward contract at fair value)
	Account Payable		2,20,000
	Foreign currency			2,20,000
	( To record the payment to supplied for purchase)
	Foreign currency		2,20,000
	Cash			2,12,000
	Forward contract			8,000
	( To record the settlement of forward contract)

Table: (2)

c.

To determine

Prepare journal entries to account for foreign currency, forward contract firm commitment and import purchase.

Explanation of Solution

The journal entries to account for foreign currency, forward contract firm commitment and import purchase:

Date	Account Title and explanation	Post Ref.	Debit($)	Credit($)
Sept-15
	(There is no entry to record either the Purchase agreement or the forward contract because both are executor contract. A memorandum designates the forward contract a hedge of the risk of changes in the fair value of the firm commitment resulting from changes in US Dollar-rubles forward exchange rate)
Sept-30	Forward contract		2,970.3
	Gain on forward contract			2,970.3
	(To record the forward contract as an assets at its fair value and record a forward contract loss for the change in the fair value)
	Loss on firm commitment		2,970.3
	Firm commitment			2,970.3
	(To record the forward commitment as liability at its fair value and record a firm commitment loss for the change in the fair value as the firm commitment since September, 30)
Oct-31	Foreign exchange loss		10,000
	Account Payable			10,000
	(To revalue at spot rate as on 10/31)
	Forward contract		2,970.3
	Gain on forward contract			2,970.3
	(To adjust the fair value and record a forward contract gain for the change in the fair value from 2970.3)
	Loss on firm commitment		22,970.3
	Firm commitment			22,970.3
	( To adjust fair value of firm commitment)
	Purchase
	Foreign currency
	( To record purchase and the payment as an liability at spot rate on October 31st )
	Foreign currency		2,20,000
	Cash			2,12,000
	Forward contract			8,000
	(To record settlement as forward contract and remove the forward contract from the accounts)
	Firm commitment		25,940.6
	Adjustment to net income			25,940.6
	( To adjust the firm commitment as an adjust to net income)

Table: (3)

d.

To determine

Prepare journal entries to account for import purchase and foreign currency option for cash flow.

Explanation of Solution

The journal entries to account for import purchase and foreign currency option for cash flow:

Date	Account Title and explanation	Post Ref.	Debit($)	Credit($)
Sept-15	Goods Purchase		2,00,000
	Account Payable ( Euros)			2,00,000
	( To record the purchase at spot)
Sept-30	Foreign currency option		7,000
	Cash			7,000
	(To record the purchase as the foreign currency option at fair value of $0.035)
Oct-31	Foreign exchange loss		10,000
	Account Payable			10,000
	(To adjust the value of Euros at spot rate and record the loss resulting from appreciation in Euros since 15th September)
	Foreign currency option		2,970.3
	AOCI ( Accumulated other comprehensive income)			2,970.3
	(To adjust the fair value option from $0.035 to $ 0.070 with corresponding credit to AOCI ( Accumulated other comprehensive income))
	Account Payable		10,000
	Foreign exchange gain			10,000
	( To adjust the value of Euros payable to new spot rate of $1.10)
	AOCI ( Accumulated other comprehensive income)		10,000
	Foreign currency option			10,000
	( To adjust the fair value of the option from $1.00 to $1.10 with corresponding credit to AOCI ( Accumulated other comprehensive income)
	Loss on foreign currency option		10,000
	AOCI ( Accumulated other comprehensive income)			10,000
	( To record loss on foreign currency option to affect the foreign currency loss on account payable with corresponding credit to AOCI ( Accumulated other comprehensive income)
	Account Payable		2,20,000
	Foreign Currency			2,20,000
	( To record payment of Euros 2,20,000 to supplied foreign Currency)
	Foreign Currency		2,20,000
	Cash			2,00,000
	Forward contract			20,000
	(To foreign Currency option to record exercise of option and remove Foreign Currency option from accounts)

Table: (4)

e.

To determine

Prepare journal entries to account for foreign currency option, firm commitment and import purchase.

Explanation of Solution

The journal entries to account for foreign currency option, firm commitment and import purchase:

Date	Account Title and explanation	Post Ref.	Debit($)	Credit($)
Sept-15	Foreign currency option		7,000
	Cash			7,000
	( To record the purchase at foreign currency option)
Sept-30	Loss on foreign currency option		7,000
	Cash			7,000
	(To adjust the fair value of option as a loss)
	Loss on firm commitment		9,901
	Firm commitment			9,901
	( To record the firm commitment as a liability at its fair value)
Oct-31	Loss on foreign currency option		6,000
	Foreign currency option			6,000
	(To adjust the fair value foreign currency option and record loss on Foreign currency option for change in fair value)
	Firm commitment		29,901
	Gain on firm commitment			29,901
	(To adjust the fair value of firm commitment and record firm commitment gain for change in fair value)
	Purchase		2,20,000
	Foreign Currency			2,20,000
	( To Record the purchase and payment at spot rate for 2,20,000 Euros as liability at spot rate as $1.1)
	Foreign Currency		2,20,000
	Cash			2,00,000
	Forward contract			20,000
	(To foreign Currency option to record exercise of option and remove Foreign Currency option from accounts)
	Firm commitment		20,000
	Adjustment to net income firm commitment			20,000
	( To lose the firm commitment as an adjustment to net income

Table: (5)

Working note:

Date	Option premium for	Foreign Currency option		Spot rate	Firm Commitment
		Fair Value	Change in fair value	-	Fair Value	Change in fair value
9/30/2017	$0.04	7,000	-	1	-	0
10/31/2017	$0.07	14,000	7,000	1.05	9,901	9,901
10/31/2107	0.1	20,000	6,000	1.1	20,000	24,901

Table: (6)