ADV. ACCT CONNECT STAND ALONE
13th Edition
ISBN: 9781266295744
Author: Hoyle
Publisher: MCG
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 9, Problem 4DYS
ANALYSIS CASE—CASH FLOW HEDGE
On February 1, 2017, Linber Company
Linber’s financial statements reported the following amounts related to this cash flow hedge (credit balances in parentheses):
| Income Statement | First Quarter 2017 | Second Quarter 2017 | |
| Premium expense | $4,000 | $ 2,000 | |
| Cost of goods sold | –0– | 103,000 | |
| Adjustment to net income | –0– | 3,000 | |
| Balance Sheet | 3/31/17 | 5/1/17 | |
| Forward contract (liability) | $(1,980)* | $ –0– | |
| AOCI (credit) | (2,020) | –0– | |
| Change in cash | –0– | (106,000) | |
*$2,000 × 0.9901 = $1,980, where 0.9901 is the present value factor for one month at an annual interest rate of 12 percent calculated as 1/1.01.
Required
- 1. On February 1, 2017, what was the U.S. dollar per euro forward rate to May 1, 2017?
- 2. On March 31, 2017, what was the U.S. dollar per euro forward rate to May 1, 2017?
- 3. Was Linber better off or worse off as a result of having entered into this cash flow hedge of a forecasted transaction? By what amount?
- 4. What does the total premium expense of $6,000 reflect?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Accounting
Duck Corporation "forecasted" on December 21, 2020 to sell a machine to a
company in Italy. The selling price was 500,000 euros, to be paid on March 21,
2021. To hedge against fluctuations in the exchange rate, Duck entered into a
forward contract on Dec. 21, 2020 to sell 500,000 euros on March 21, 2021, the
agreed date of machine delivery, for $1.227 per euro. The company ends its
fiscal year on December 31. The following exchange rates were quoted:
Forward Rate
Date
Spot Rate
(Delivery on 3/21/2020)
12/21/2020
1.228
1.227
12/31/2020
1.222
1.221
3/21/2021
1.225
Required:
A. Prepare all journal entries relative to the above event on December 21, 2020.
B. Prepare all journal entries relative to the above event on December 31, 2020.
C. Prepare all journal entries relative to the above event on March 21, 2021.
Hedging Foreign Exchange Risk
On November 1, 2022, Ambrose Co. purchased inventory from a customer for 120,000 FCUs with
payment to be received on April 30, 2023. At the date of sale, Ambrose entered into a forward exchange
contract wherein 120,000 FCUS would be received from a currency broker in six months. The six month
forward exchange rate on that date was 1 FCU = $0.52. The spot rates and forward rates on various dates
were as follows:
Date
November 1, 2022
December 31, 2022
April 30, 2023
REQUIRED: Prepare journal entries
Spot Rate
$0.53= 1 FCU
$0.50 = 1 FCU
$0.491 FCU
for this transaction
Forward Rate (4/30/2023)
$0.52 = 1 FCU
$0.48 = 1 FCU
N/A
and forward contract.
On November 1, 2017, Dos Santos Company forecasts the purchase of raw materials from a Brazilian supplier on February 1, 2018, at a price of 200,000 Brazilian reals. On November 1, 2017, Dos Santos pays $1,500 for a three-month call option on 200,000 reals with a strike price of $0.40 per real. Dos Santos properly designates the option as a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2017, the option has a fair value of $1,100. The following spot exchange rates apply:
Date
U.S. Dollar per Brazilian real
November 1, 2017
$0.40
December 31, 2017
0.38
February 1, 2018
0.41
What is the net impact on Dos Santos Company’s 2018 net income as a result of this hedge of a forecasted foreign currency transaction? Assume that the raw materials are consumed and become a part of the cost of goods sold in 2018. Choose the correct.a. $80,000 decrease in net income.b. $80,600 decrease in net income.c. $81,100 decrease in net income.d. $83,100 decrease in…
Chapter 9 Solutions
ADV. ACCT CONNECT STAND ALONE
Ch. 9 - Prob. 1QCh. 9 - Prob. 2QCh. 9 - What factors create a foreign exchange gain on a...Ch. 9 - In what way is the accounting for a foreign...Ch. 9 - Prob. 5QCh. 9 - How does a foreign currency option differ from a...Ch. 9 - Prob. 7QCh. 9 - Why would a company prefer a foreign currency...Ch. 9 - How do companies report foreign currency...Ch. 9 - How does a company determine the fair value of a...
Ch. 9 - What is hedge accounting?Ch. 9 - Prob. 12QCh. 9 - What are the differences in accounting for a...Ch. 9 - What are the differences in accounting for a...Ch. 9 - What are the differences in accounting for a...Ch. 9 - Prob. 16QCh. 9 - Prob. 1PCh. 9 - Prob. 2PCh. 9 - Prob. 3PCh. 9 - Prob. 4PCh. 9 - Prob. 5PCh. 9 - Grace Co. had a Chinese yuan payable resulting...Ch. 9 - Prob. 7PCh. 9 - Prob. 8PCh. 9 - Prob. 9PCh. 9 - Prob. 10PCh. 9 - Prob. 11PCh. 9 - Prob. 12PCh. 9 - On March 1, Pimlico Corporation (a U.S.-based...Ch. 9 - Torres Corporation (a U.S.-based company) expects...Ch. 9 - Prob. 15PCh. 9 - What was the net impact on Jensen Companys 2018...Ch. 9 - What was the net increase or decrease in cash flow...Ch. 9 - What is the net impact on Micros net income for...Ch. 9 - What is the net impact on Micros net income for...Ch. 9 - What is Micros net increase or decrease in cash...Ch. 9 - What is the net impact on Dos Santos Companys 2017...Ch. 9 - Prob. 22PCh. 9 - Prob. 23PCh. 9 - Prob. 24PCh. 9 - Prob. 25PCh. 9 - Prob. 26PCh. 9 - Prob. 27PCh. 9 - Prob. 28PCh. 9 - Prob. 29PCh. 9 - Prob. 30PCh. 9 - Prob. 31PCh. 9 - Use the same facts as in Problem 31 except that...Ch. 9 - On June 1, Alexander Corporation sold goods to a...Ch. 9 - On June 1, Cairns Corporation purchased goods...Ch. 9 - Prob. 35PCh. 9 - Prob. 36PCh. 9 - Prob. 37PCh. 9 - Prob. 38PCh. 9 - Prob. 39PCh. 9 - Prob. 40PCh. 9 - Based on past experience, Leickner Company expects...Ch. 9 - Prob. 42PCh. 9 - RESEARCH CASEINTERNATIONAL FLAVORS AND FRAGRANCES...Ch. 9 - Prob. 2DYSCh. 9 - Prob. 3DYSCh. 9 - ANALYSIS CASECASH FLOW HEDGE On February 1, 2017,...Ch. 9 - Prob. 5DYSCh. 9 - COMMUNICATION CASEFORWARD CONTRACTS AND OPTIONS...
Knowledge Booster
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.Similar questions
- On November 1, 2017, Dos Santos Company forecasts the purchase of raw materials from a Brazilian supplier on February 1, 2018, at a price of 200,000 Brazilian reals. On November 1, 2017, Dos Santos pays $1,500 for a three-month call option on 200,000 reals with a strike price of $0.40 per real. Dos Santos properly designates the option as a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2017, the option has a fair value of $1,100. The following spot exchange rates apply: Date U.S. Dollar per Brazilian real November 1, 2017 $0.40 December 31, 2017 0.38 February 1, 2018 0.41 What is the net impact on Dos Santos Company’s 2017 net income as a result of this hedge of a forecasted foreign currency transaction? Choose the correct.a. $–0–.b. $400 decrease in net income.c. $1,000 decrease in net income.d. $1,400 decrease in net income.arrow_forwardOn January 1,2015, Nathan Co paid 6,000 cash to acquire a put foreign exchange option FC37,500 which expires at the end of the year. The option hedges 2015's forecasted sales of FC37,500.Nathan's fiscal year ends every October 31. 1/1/15 10/31/15 12/31/15Spot rate ( market price) 1.45. 1.20 1.30Strike price (exercise price) 1.40 1.40 1.40Fair value of put action 6,000 25,250 Determine the intrinsic value at inception of the option contract.12,7504,1256,0000arrow_forwardHedged Forecasted Purchase Constellation Brands, a U.S. company, purchases merchandise from a German supplier on a regular basis. On April 1, 2016, Constellation purchased €10,500 for delivery on June 30, 2016, in anticipation of an expected purchase of merchandise for €10,500 at the end of June. The forward contract was a qualified hedge of a forecasted transaction. Constellation took delivery of the merchandise, settled the forward contract, and paid the German supplier €10,500 on June 30, 2016. The merchandise was subsequently sold in the U.S. on July 12, 2016, for $14,250 in cash. Relevant exchange rates ($/€) are as follows: Spot rate Forward rate for delivery June 30, 2016 $1.30 April 1, 2016 $1.32 June 30, 2016 1.36arrow_forward
- Obtain the dirty price in pesos, if on January 27, 2017 a UDIBONO is purchased that was issued at 1,092 days on November 3, 2016. The current coupon rate is 3.85% and 3.92% is quoted on the market. The transaction was settled value date 48 hours. The value of the UDI was: Answer: 100.742262arrow_forwardUse the following information for Problems 21 and 22.On November 1, 2017, Dos Santos Company forecasts the purchase of raw materials from a Brazilian supplier on February 1, 2018, at a price of 200,000 Brazilian reals. On November 1, 2017, Dos Santos pays $1,500 for a three-month call option on 200,000 reals with a strike price of $0.40 per real. Dos Santos properly designates the option as a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2017, the option has a fair value of $1,100. The following spot exchange rates apply:What is the net impact on Dos Santos Company’s 2018 net income as a result of this hedge of a forecasted foreign currency transaction? Assume that the raw materials are consumed and become a part of the cost of goods sold in 2018.a. $80,000 decrease in net income.b. $80,600 decrease in net income.c. $81,100 decrease in net income.d. $83,100 decrease in net income.arrow_forwardUn November 1, 2020 ABC Company (ABC), the U.S. based company forecasts the purchase of goods from a foreign supplier for 100,000 yuan. ABC expects to receive the goods on April 20, 2021, and make immediate payment. On November 1, 2020, ABC enters into a six-month forward contract to buy 100,000 yuan. The company properly designates the forward contract as a cash flow hedge of a forecasted foreign currency transaction. Forward points are excluded in assessing hedge effectiveness and are amortized to net income using a straight-line method on a monthly basis over the life of the contract. The following U.S. dollar - Yuan exchange rates apply: Date November 1, 2020 December 31, 2020 April 30, 2021 Spot Rate $0.21 $0.19 $0.18 Forward Rate to April 30, 2021 $0.195 $0.170 N/A As expected, ABC receives the goods from the supplier on April 30, 2021 and pays 100,000 yuan immediately. ABC sells the imported goods in the local market in May 2021. Required: Prepare all journal entries and…arrow_forward
- Q1-11 Suppose that a speculator notes that the current 3-month forward rate on the euro is $1.26 and the speculator expects that, in 3 months, the euro will have a value of $1.30. In this situation, the speculator would _______ euros on the forward market, and this activity ______ for the speculator. a. buy / involves risk b. buy / involves no possible risk c. sell / involves risk d. sell / involves no possible riskarrow_forwardOur firm purchased equipment for US$100,000 on Dec 1, 2015. Our year end is December 31, and the payable is due on Jan 31, 2016. On December 1, 2015, we entered into a forward exchange contract with the bank to provide us with the US dollars on January 31, 2016. The following rates were in effect: Forward Rates: Dec1,2015; 60 day forward rate US$1= CDN$1.152 Dec 31, 2015; 30 day forward rate US$1 = CDN$ 1.162 Spot rates Dec 1, 2015 US$1 = CDN$ 1.130 Dec 31, 2015 US$1 = CDN$ 1.16 Jan 31, 2016 US$1 = CDN$ 1.210 Prepare all the journal entries arising from this transaction, from original sale to final settlement. Answer within 40mins,it would be really helpful!!arrow_forwardDemonstrate how FRAs, BAB futures and interest rate swaps establishes the company's cost of funds for the initial issue of the bills in a bills facility. For the purposes of your demonstration, assume: the two-year bill facility uses 90-day BABs with a face value of $1 million; the facility is being organised in May for commencement in mid June 2022; when the bill facility was being organised the sune 2022 BAB futures price was 94.45 and the September 2022 BAB futures price was 94.65; the two-year swap rate in June is 5.45%pa the 90-day spot rate was 5.35%pa in mid-June (the settlement date for June 2022 futures) the June FRA rate matches the relevant BAB futures ratearrow_forward
- On January 1, 2017, Roxan Company sold equipment to Mitsuko Company of Japan for ¥20,000,000 with payment to be received in two years on January 1, 2019. On January 1, 2017, the exchange rate is ¥0.50 = P1. On the same date, Roxan enters into a futures contract and agrees to sell ¥20,000,000 on January 1, 2019 at the rate of ¥0.50 = P1. On December 31, 2017, the exchange rate is ¥0.47 = P1. On December 31, 2019, the exchange rate is ¥0.55 = P1. The appropriate discount rate throughout this period is 10%. Required: Make all journal entries necessary on Roxan Company's books in 2017, 2018, and 2019 to record this sale, the futures contract and the collection of the receivables.arrow_forwardThe EUR/USD quotes 1.1295-1.1305 and you implement a long position for 100,000 €. 2 days later the EUR/USD shows 1.1431-1.1441. What is your P&L? a)1260 $ b)1460 $ c)1260 € d)1460 €arrow_forward2) XYZ has cash of FC 100,000 on both April 30 and May 31, 2010. The applicable spot rates for April 30 and May 31 are as follows: April 30: 1US = 5FC May 31: 1 US= 4FC How much is the FX transaction gain or loss on May 31, 2010.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Financial Accounting - Long-term Liabilities - Bonds; Author: Finance & Accounting Videos by Prof Coram;https://www.youtube.com/watch?v=_1fwsJIGMos;License: Standard Youtube License