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2011 week 10 FOREIGN CURRENCY TRANSACTIONS

2011 week 10 FOREIGN CURRENCY TRANSACTIONS - CMA...

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1 Financial Accounting - Module 2 62 (6) Foreign Currency Transactions 63 Foreign Currency Transactions - Monetary Balances record initial transaction at the current rate of exchange on settlement, any difference between the amount accrued and the settlement amount gets recorded as a gain/loss on foreign exchange monetary assets and liabilities (and nonmonetary items carried at market) are translated at the exchange rate on the balance sheet date -> the offsetting entry on adjustment gets recorded as a FX gain/loss monetary assets and liabilities are defined as those fixed in a given amount of currency CMA Accelerated Program - 2011/2012 Lecture Student Weekly File - Week 10 © CMA Ontario, 2011 1 of 20
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2 Financial Accounting - Module 2 64 Offsetting monetary balances with a forward contract offsetting a monetary balance with a forward contract after the transaction date: set up the transaction at the spot rate on day the forward contract is taken out - no entry intervening year end: adjust the AR or AP to the spot rate, any changes in the market value of the Forward Contract are offset by FX gains/losses » forward contract is marked to market by the forward rate ending on the same date as the original contract on settlement: settle with bank (dr. or cr. Cash), clear AP or AR, clear any entries to the forward contract account; difference to FX gains/losses CMA Accelerated Program - 2011/2012 Lecture Student Weekly File - Week 10 © CMA Ontario, 2011 2 of 20
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Problem 15 – Foreign Currency Transactions Richmond-Davis Company, a Canadian firm, sold hospital equipment to Salem Ltd. Of the UK on November 2, 20x7 for £100,000, payable in 90 days, on January 30, 20x8. Richmond-Davis's year end is December 31, 20x7. Relevant rates are as follows: October 1, 20x7 120-day forward rate £1 = $1.642 October 1, 20x7 Spot rate £1 = $1.645 November 2, 20x7 Spot rate £1 = $1.650 November 3, 20x7 Spot rate £1 = $1.650 November 3, 20x7 90-day forward rate £1 = $1.638 December 31, 20x7 Spot rate £1 = $1.660 December 31, 20x7 30-day forward rate £1 = $1.663 January 30, 20x8 Spot rate £1 = $1.665 February 15, 20x8 Spot rate £1 = $1.668 Required - Prepare all journal entries on the following assumptions: a. no forward contract is taken out to offset the receivable b. a forward contract is taken out to offset the receivable on November 3, 20x7 c. a forward contract is taken out to offset the receivable on November 3, 20x7 but the payment from the customer is received on February 15, 20x8 CMA Accelerated Program - 2011/2012 Lecture Student Weekly File - Week 10 © CMA Ontario, 2011 3 of 20
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Problem 17 – Foreign Currency Transactions Sable Company has a calendar year end. On January 1, 20x1, the company borrowed 2,000,000 Euros from a German bank. The loan is to be repaid on January 1, 20x5. Interest of 8% is payable at December 31 of each year. During the first year of the loan, the following exchange rates were in effect: January 1, 20x1 1 Euro = $C0.945 December 31, 20x1 1 Euro = $C0.939 20x1 average rate 1 Euro = $C0.941 Required Prepare the journal entries to record the transactions on 20x1.
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