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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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