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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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