Practice 7 - Ch 9 FCT and Hedging

Practice 7 - Ch 9 FCT and Hedging - Ch 9: Foreign Currency...

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1 Ch 9: Foreign Currency Transaction and Hedging Foreign Exchange Risk Five Practice Problems: 9-26, 9-31, 9-33, 9-38 and 9-41 Solutions: Problem 1: 9 – 26 (foreign currency accounting, no hedging) (10 minutes) 12/1/11 Inventory $52,800 Accounts Payable (LCU) [60,000 x $.88] $52,800 12/31/11 Accounts Payable (LCU) [60,000 x ($.82 – $.88)] $3,600 Foreign Exchange Gain $3,600 1/28/12 Foreign Exchange Loss $4,800 Accounts Payable (LCU) [60,000 x ($.90 – $.82)] $4,800 Accounts payable (LCU) $54,000 Cash $54,000 Problem 2: 9 -31 (Forward contract Cash Flow/Fair Value hedge of foreign currency denominated A/R, (40 minutes) a. Cash Flow Hedge 12/1/11 Accounts Receivable (K) [20,000 x $2.00] $40,000 Sales $40,000 No entry for the forward contract. 12/31/11 Accounts Receivable (K) $2,000 Foreign Exchange Gain $2,000 [20,000 x ($2.10-$2.00)] AOCI $2,450.75 Forward Contract $2,450.75 [20,000 x ($2.075 – $2.20) = $2,500 x .9803 = $2,450.75] Loss on Forward Contract $2,000 AOCI $2,000 AOCI $500 Premium Revenue $500 [20,000 x ($2.075 – $2.00) = $1,500 x 1/3 = $500]
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2 31. (continued) Impact on 2011 income : Sales $40,000 Foreign Exchange Gain 2,000 Loss on Forward Contract (2,000) Premium Revenue 500 Total $40,500 3/1/12 Accounts Receivable (K) $3,000 Foreign Exchange Gain $3,000 [20,000 x ($2.25 – $2.10)] AOCI $1,049.25 Forward Contract $1,049.25 [20,000 x ($2.25 – $2.075) = $3,500 – 2,450.75] = $1,049.25 Loss on Forward Contract $3,000 AOCI $3,000 AOCI $1,000 Premium Revenue $1,000 [$1,500 x 2/3 = $1,000] Foreign Currency (K) [20,000 x $2.25] $45,000 Accounts Receivable (K) $45,000 Cash [20,000 x $2.075] $41,500 Forward Contract 3,500 Foreign Currency (K) $45,000 Impact on 2012 income : Foreign Exchange Gain $3,000 Loss on Forward Contract (3,000) Premium Revenue 1,000 Total $1,000 Impact on net income over both periods: $40,500 + $1,000 = $(41,500); equal to cash inflow.
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3 31. (continued) b. Fair Value Hedge 12/1/11 Accounts Receivable (K) [20,000 x $2.00] $40,000 Sales $40,000 No entry for the forward contract.
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This note was uploaded on 02/22/2012 for the course ACCT 501 taught by Professor Ma during the Spring '11 term at South Carolina.

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Practice 7 - Ch 9 FCT and Hedging - Ch 9: Foreign Currency...

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