Sample_exam_answers - Question 2 SPARKLING LIGHTS INC...

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Question 2 SPARKLING LIGHTS INC. on Feb 28, at a forward rate of 0.610 denominated account payable Euro-denominated asset, which offsets the forward value of the Euro- denominated account payable, because the two Euro-denominated items are of corresponding term and amounts. a ACCOUNT PAYABLE A/P Spot Amount Value Date Rate Euro CAD 28-Feb 0.600 600,000 1,000,000 31-Mar 0.586 600,000 1,023,891 30-Apr 0.593 600,000 1,011,804 FORWARD CONTRACT Contract Contract Forward Payable Receivable Net Rate to Amount (fixed) (Euro-denom) Contract Date 30-Apr Euro CAD CAD Value 28-Feb 0.610 600,000 983,607 983,607 31-Mar 0.590 600,000 983,607 1,016,949 33,343 30-Apr 0.593 600,000 983,607 1,011,804 28,198 28-Feb DR Inventory 1,000,000 CR A/P (E600,000) 1,000,000 - to record receipt of inventory at spot: E600,000 @ .600 = $ 1,000,000 28-Feb DR Forward Contract receivable 983,607 CR Forward Contract payable 983,607 - to record forward contract , value of contract payable and receivable = $ 983,607 31-Mar DR FX Loss 23,891 CR A/P (E600,000) 23,891 - to revalue A/P balance to current spot: E600K @ 0.586 = $ 1,023,891 31-Mar DR Forward Contract 33,343 CR FX gain 33,343 - to revalue forward contract to net value of $33,343; value of contract receivable = $ 1,016,949 Hedged Position: euro-denominated A/P balance in the amount of E600,000 Risk being hedged: FX price risk Hedge/Hedging Item: 60 day forward contract to purchase E600,000, signed Type of Hedge: fair value hedge of the forward value of the Euro- Hedge Effectiveness: the forward contract represents the forward value of a
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30-Apr DR
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  • Fall '10
  • KONG
  • Generally Accepted Accounting Principles, day forward, CTA, A/P Balance, Contract Receivable

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