Ch.9 HW - 18 and 19. The easiest way to solve problems 18...

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18 and 19. The easiest way to solve problems 18 and 19 is to prepare journal entries for the forward contract fair value hedge of a firm commitment. The journal entries are as follows: 3/1 no journal entries 3/31 Forward Contract $1,250 Gain on Forward Contract $1,250 ($1,250 – $0) Loss on Firm Commitment $1,250 Firm Commitment $1,250 Net impact on first quarter net income is $0. 4/30 Loss on Forward Contract $250 Forward Contract $250 [Fair value of forward contract is ($.120 – $.118) x 500,000 = $1,000; $1,000 – $1,250 = $250] Firm Commitment $250 Gain on Firm Commitment $250 Foreign Currency (pesos) $59,000 Sales [500,000 pesos x $.118] $59,000 Cash [500,000 x $.120] $60,000 Foreign Currency (pesos) $59,000 Forward Contract 1,000 Firm Commitment $1,000 Adjustment to Net Income $1,000 Net impact on second quarter net income is: Sales $59,000 – Loss on Forward Contract $250 + Gain on Firm Commitment $250 + Adjustment to Net Income $1,000 = $60,000. 18. A
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19. C 20. B Cash inflow with forward contract [500,000 pesos x $.12] $60,000 Cash inflow without forward contract [500,000 pesos x $.118] 59,000 Net increase in cash flow from forward contract $ 1,000 24. (10 minutes) (Foreign Currency Sale/Receivable) The ostra receivable decreases in dollar value from (50,000 x $1.05) $52,500 at December 20 to $51,000 (50,000 x $1.02) at December 31, resulting in a foreign exchange loss of $1,500 in 2009. The further decrease in dollar value of the ostra receivable from $51,000 at December 31 to $49,000 (50,000 x $.98) at January 10 results in an additional $2,000 foreign exchange loss in 2010. 25. (10 minutes) (Foreign Currency Sale/Receivable) 9/15 Accounts Receivable (FCU) [100,000 x $.40] $40,000 Sales $40,000 9/30 Accounts Receivable (FCU) $2,000 Foreign exchange Gain $2,000 [100,000 x ($.42 – $.40)] 10/15 Foreign Exchange Loss $5,000 Accounts Receivable (FCU) [100,000 x ($.37 – $.42)] $5,000 Cash $37,000 Accounts Receivable (FCU) $37,000 27. (15 minutes) (Determine U.S. Dollar Balance for Foreign Currency Transactions) Inventory and Cost of Goods Sold are reported at the spot rate at the date the inventory was purchased. Sales are reported at the spot rate at the date of sale. Accounts Receivable and Accounts Payable are reported at the spot rate at the balance sheet date. Cash is reported at
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This note was uploaded on 03/06/2011 for the course ECON 435 taught by Professor Galven during the Spring '11 term at Ill. Chicago.

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Ch.9 HW - 18 and 19. The easiest way to solve problems 18...

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