B. Woods Chapter 12

178 Foreign Currency Concepts and Transactions
Chapter 12
FOREIGN CURRENCY CONCEPTS AND TRANSACTIONS
Answers to Questions
1 A transaction is measured in a particular currency if its magnitude is

expressed in that currency. Assets and liabilities are denominated in a
currency if their amounts are fixed in terms of that currency.
2 A Canadian dollar is a foreign currency from the viewpoint of a U.S.

corporation and from the viewpoint of a Canadian entity whose functional
currency is not the Canadian dollar. This is because a foreign currency is any
currency other than the functional currency of the entity being referred to.
3 Direct quotation: .72/1 = $.72

Indirect quotation: 1/.72 = 1.3889 Canadian dollars
4 Official or fixed rates are set by a government and do not change as a

result of changes in world currency markets. Free or floating exchange rates
are those that reflect fluctuating market prices for currency based on supply
and demand factors in world currency markets. The United States changed
from fixed to floating (free) exchange rates in 1971. But the U.S. dollar is
sometimes described as a "filthy float" because the United States has
frequently engaged in currency transactions to support or weaken the dollar
against other currencies. Such action is taken for economic reasons, such as
to make U.S. goods more competitive in world markets. Both Japan and
Germany have engaged in currency transactions in an attempt to support the
U.S. dollar. In February 1987, the United States and six other industrial
nations (the Group of 7 or G-7) entered the Louvre accord to cooperate on
economic and monetary policies in support of agreed upon exchange rate
levels.
5 Spot rates are the exchange rates for immediate delivery of currencies
exchanged. The current rate for foreign currency transactions is the spot rate
in effect for immediate settlement of the amounts denominated in foreign
currency at the balance sheet date. Historical rates are the rates that were in
effect on the date that a particular event or transaction occurred.
6 The transaction is a foreign transaction because it involves import

activities, but it is not a foreign currency transaction for the U.S. firm because
it is denominated in local currency. It is a foreign currency transaction for the
Japanese company.
7 At the transaction date, assets and liabilities denominated in foreign

currency are translated into dollars by use of the exchange rate in effect at
that date, and they are recorded at that amount.
At the balance sheet date, cash and amounts owed by or to the enterprise
that are denominated in foreign currency are adjusted to reflect the current
rate. Assets carried at market whose current market price is stated in a
foreign currency are adjusted to the equivalent dollar market price at the
balance sheet date.
8 Exchange gains and losses occur because of changes in the exchange rates
between the transaction date and the date of settlement. Both exchange
gains and exchange losses can occur in either foreign import activities or
foreign export activities. The statement is erroneous.
9 Exchange gains and losses on foreign currency transactions are reflected in

income in the period in which the exchange rate changes except for hedges of
an identifiable foreign currency commitment where deferral is possible if
certain requirements are met. Also hedges of a net investment in a foreign
entity are treated as equity adjustments from translation. Intercompany
foreign currency transactions of a long-term nature are also treated as equity
adjustments.
Chapter 12 180
10 There will be a $20 exchange loss in the period of purchase and a $10
exchange gain in the period of settlement:
Billing date
Purchases $1,450
Accounts payable (fc) $1,450
Year-end adjustment
Exchange loss $ 20
Accounts payable (fc) $ 20
Settlement date
Cash $1,460
Exchange gain 10
11 A forward exchange contract (or futures contract) is an agreement to

exchange at a specified future date, currencies of different countries at a
specified rate (the forward rate). Futures contracts (derivative instruments)
are used to speculate in foreign currency exchange price movements, to
hedge an exposed foreign currency net asset or net liability position, to hedge
an anticipated or actual foreign currency commitment, or to hedge a net
investment in a foreign entity.
12 The purpose of the derivative contract is to mitigate or eliminate potential

foreign exchange gains or losses. The derivative contract is carried at the
forward rate (fair value) while the underlying liability is carried at the spot
rate. If these two rates do not move exactly in tandem a recognized gain or
loss would be the result.
13 A hedge against an identifiable foreign currency commitment fixes the

price of the commitment at the future rate. Any gains or losses on the hedge
are exactly offset by changes in the value of the underlying firm commitment.
No gain or loss would need to be recognized.
SOLUTIONS TO EXERCISES
Solution E12-1
1 b
2 d
3 d
4 b
Solution E12-2
1 The dollar weakened against the yen.
2 10,000,000 yen x $.0075 = $75,000
3 Accounts payable $75,000

Exchange loss 1,000
Cash $76,000
4 Zimmer would have entered a contract to purchase yen for

future receipt.
Solution E12-3
December 16, 2003

Purchases $18,900
Accounts payable (euros) $18,900
To record purchase of merchandise from Hughes
Corporation for 30,000 euros at $.63 spot rate.
December 31, 2003

Exchange loss $ 900
Accounts payable (euros) $ 900
To adjust accounts payable to Hughes: ($.66 - $.63) x
30,000 euros.
January 15, 2004

Accounts payable (euros) $19,800
Exchange gain $ 600
Cash 19,200
Chapter 12 182
To record payment of 30,000 euros at $.64 spot rate in
settlement of account payable and to recognize gain.
Solution E12-4
Adjustment in value of account receivable for 2005:

($.72 - $.70) x 40,000 C$ = $800 exchange gain
Adjustment in value of account receivable at settlement in 2006:

($.71 - $.72) x 40,000 C$ = $400 exchange loss
Solution E12-5
May 1, 2003
Accounts receivable (fc) $200,000
Sales $200,000
To record sale of inventory items to Royal for 120,000
pounds: 120,000 pounds/.6000 pounds (indirect
quotation).
May 30, 2003

Cash (fc) $198,347
Exchange loss 1,653
To record receipt of 120,000 pounds from Royal in
settlement of accounts receivable: 120,000
pounds/.6050 pounds.
Solution E12-6 [AICPA adapted]
1 c On December 31, 2007 Bain received payment of 300,000

LCU with a market value of $105,000 in payment of an
account receivable recorded at $100,000, for a foreign
exchange gain of $5,000.
2 d On December 31, 2004 Yumi Corp. adjusts its account

payable denominated in a foreign currency from $5,500
to $7,000 (10,000 x $.70) and recognizes a loss of
$1,500 [10,000 LCU x ($.70 - $.55)]
3 d December 31, 2004 note payable $240,000

July 1, 2005 note payable 280,000
2005 exchange loss $(40,000)
4 d Note receivable December 31, 2003 $140,000

Amount collected July 1, 2004
Chapter 12 184
(840,000 LCU 8) 105,000
2004 exchange loss $ 35,000
Solution E12-7
1. Exchange gain or loss in 2003: Gain or (Loss)
Account receivable December 16 $103,500
December 31 adjusted balance
150,000 C$ x $0.68 102,000 $(1,500)
Account payable December 2 $195,250
December 31 adjusted balance
275,000 C$ x $0.68 187,000 8,250
Net exchange gain for 2003 $6,750
2. Exchange gain or loss in 2004:

Account receivable adjusted 12/31 $102,000
Account receivable 1/16/04 101,250 $ (750)
Account payable adjusted 12/31 $187,000
Account payable 1/30/04 188,375 (1,375)
Net exchange loss for 2004 $(2,125)
Solution E12-8
1 December 12, 2003
Purchases $375,000
Accounts payable (yen) $375,000
Purchase from Toko Company (50,000,000 yen x $.00750).
December 15, 2003
Accounts receivable (pounds) $ 66,000
Sales $ 66,000
Sale to British Products Company (40,000 pounds x
$1.652).
2 December 31, 2003
Exchange loss $ 5,000
Accounts payable (yen) $ 5,000
To adjust accounts payable denominated in yen for
exchange rate change: 50,000,000 yen x ($.00760 -
$.00750).
To adjust accounts receivable denominated in pounds for
exchange rate change: 40,000 pounds x ($1.65 - $1.60).
3 January 11, 2004
Accounts payable (yen) $380,000
Exchange loss 2,500
Cash $382,500
To record payment to Toko Company (50,000,000 yen x
$.00765).
January 14, 2004
Cash $ 65,200
Chapter 12 186
Exchange gain 1,200
To record receipt from British Products Company:
40,000 pounds x $1.63.
Solution E12-9
March 1, 2008
Purchases $16,300
Accounts payable (LCU) $16,300
To record purchase of inventory items denominated in

LCUs:
100,000 LCUs x $.1630.
Contract receivable (LCU) $16,500

Contract payable $16,500
To record purchase of 100,000 LCUs for delivery in 90

days.
May 30, 2008

Cash (LCU) $16,000
Exchange loss 500
To record receipt of 100,000 LCUs from the exchange

broker when the exchange rate is $.1600. Exchange
loss: 100,000 LCUs x ($.1650 - $.1600).

Cash $16,500
To record settlement of forward contract with the

exchange broker.

Cash (LCU) $16,000
Exchange gain 300
To record payment to Cavilier of 100,000 LCUs. Gain:

100,000 LCUs x ($.1630 - $.1600).
Chapter 12 188
Solution E12-10
1 The exchange loss on the account payable denominated in LCU will

offset the exchange gain on the contract receivable, also denominated
in LCU, so that there will be no exchange gain or loss in 2008.
2 The income effect in 2009 will be amortization of the premium on

the forward contract: 10,000,000 LCU x ($.00057 - $.00055) = $200
premium
$200 premium x 30/60 days = $100 amortization
Supporting entries:
Purchase transaction December 1, 2008
Inventory $5,500
To record purchase of merchandise denominated in LCU:
(10,000,000 LCU x $.00055)
Hedge transaction December 1, 2008
Premium on forward contract 200
Contract payable 5,700
To record forward contract to buy 10,000,000 LCU from the
exchange broker at $.00057.
December 31, 2008 adjustments
Contract receivable (LCU) $ 100
Exchange gain $ 100
To record year-end adjustment of contract receivable ($.57
- $.56) x 10,000,000.
Exchange loss $ 100
Accounts payable (LCU) $ 100
To record year-end adjustment of account payable.
Amortization expense $ 100
Premium on forward contract $ 100
To record amortization of premium (30/60 days x $200).
January 30, 2009
Cash $5,500
Exchange gain 100
To record payment to Benetton of 10,000,000 LCU.
Cash $5,500
Exchange loss 100
To record receipt of 10,000,000 LCU from the exchange
broker.
Cash $5,700
To record payment of cash to the exchange broker.
Amortization expense $ 100
To record amortization of premium.
Chapter 12 190
Solution E12-11 [AICPA adapted]
1 d Imp's contract with the exchange broker is for the

purchase of LCUs. Therefore, the contract receivable
is denominated in LCUs. Gain on the year-end
adjustment is $10,000 [$100,000 x ($.98 current rate -
$.88 historical rate)]
2 a In accounting for a hedge of a foreign currency

commitment, the gain or loss is deferred and treated as
an adjustment of the cost of the equipment.
3 b The speculation is valued at the forward rate

throughout the life of the contract [100,000 LCU x
($.93 - $.90)].
Solution E12-12
(1) (2)
Foreign Balance Gain
Currency Exchange Sheet or
Units Rate Amounts (Loss)
British pounds 50,000 $1.67 $ 83,500 $(1,500)

Euros 200,000 $0.60 120,000 10,000
Japanese yen 10,000,000 $0.0080 80,000 4,000
$283,500 $12,500 gain
Solution E12-13
June 8, 2008
Purchases $16,000
Accounts payable (pounds) $16,000
To record purchase of merchandise denominated in pounds
(10,000 pounds x $1.60)
July 7, 2008
Exchange loss 100
Cash $16,100
To record payment on account (10,000 pounds x $1.61).
October 1, 2008
Accounts receivable (euros) $20,100
Sales $20,100
To record sale denominated in euros (30,000 euros x
$.67).
October 19, 2008

Cash $19,950
Exchange loss 150
Accounts receivable (euros) $20,100
To record receipt of 30,000 euros in settlement of
account receivable. Cash: 30,000 euros x $.665.
November 16, 2008
Accounts receivable (krona) $67,000
Sales $67,000
To record sale of merchandise denominated in krona
(500,000 krona x $.134).
Contract receivable $66,900

Discount on forward contract 100
Contract payable (krona) $67,000
To record forward contract to sell 500,000 krona in 60
days at a forward rate of $.1338.
December 31, 2008
Accounts receivable (krona) $ 150
Exchange gain $ 150
To revalue account receivable denominated in krona for
exchange rate change: 500,000 krona x ($.1343 -
$.134).
Exchange loss $ 150
Contract payable (krona) $ 150
To revalue liability to the exchange broker.
Chapter 12 192
Amortization of discount $ 75
Discount on forward contract $ 75
To amortize discount: $100 x 45/60 days.
Solution E12-14
April 1, 2009
Contract payable (fc) $35,250
To record forward contract to sell 50,000 Canadian

dollars to the exchange broker at the forward rate of .
705 for delivery on May 31 for $35,250.
May 31, 2009

Cash (fc) $36,250
Sales $36,250
To record sale of fittings to Windsor for 50,000

Canadian dollars: ($.725 x 50,000 Canadian)

Exchange loss on forward contract 1,000
Cash (fc) $36,250
To record payment of the contract denominated in

Canadian dollars to the exchange broker.
Cash $35,250
To record receipt of the $35,250 from the exchange

broker to settle the account receivable denominated in
U.S. dollars.
Sales $ 1,000
To reclassify exchange loss on forward contract as an

adjustment of the selling price.
Chapter 12 194
Solution E12-15
1 Entry on November 2 for contract with the exchange broker:
Contract receivable (fc) $7,800

To record contract to purchase 1,000,000 yen in 90 days
at the future rate.
2 No journal entry needed as the 30day future rate at the end

of the year is at $.0078 which was the same rate as the
ninety day rate on November 2.
Solution E12-16
October 2, 2003
To record contract to sell 1,000,000 euros to exchange
broker in 180 days for the forward rate of $.6530.
December 31, 2003

Contract payable (fc) $ 12,000
Exchange gain $ 12,000
To adjust contract payable in euros to the 90-day
forward rate of $.6410.
March 31, 2004

Exchange loss 14,000
Cash (fc) $655,000
To record payment of 1,000,000 euros to exchange broker
when spot rate is $.6550.
Cash $653,000
To record receipt of U.S. dollars from exchange broker
in settlement of account.
SOLUTIONS TO PROBLEMS
Solution P12-1
1 and 2 Per Balance Exchange Gain
Books Sheet or (Loss)
Accounts receivable
U.S. dollars $28,500 $28,500
Swedish Krona (20,000x$.66) 11,800 13,200 $ 1,400
British pounds(25,000x$1.65) 41,000 41,250 250
$81,300 $82,950 1,650
Accounts payable
U.S. dollars $ 6,850 $ 6,850
Canadian dollars (10,000x$.70) 7,600 7,000 $ 600
British pounds (15,000x$1.65) 24,450 24,750 (300)
$38,900 $38,600 300
Net exchange gain $ 1,950
3 Collect receivables:
Cash $28,500
Accounts receivable $28,500
To record collection of accounts receivable.
Cash $13,400
Accounts receivable (Krona) $13,200
Exchange gain 200
To collect 20,000 Krona at $.67 spot rate.
Cash $40,750
Exchange loss 500
Accounts receivable (pounds) $41,250
To collect 25,000 pounds at $1.63 spot rate.
4 Settlement of accounts payable:
Accounts payable $ 6,850

Cash $ 6,850
To record payment of accounts denominated in dollars.
Accounts payable (Canadian $) $ 7,000

Exchange loss 100
Cash $ 7,100
To record payment of account denominated in Canadian
dollars.

Chapter 12 196
Cash $24,300
Exchange gain 450
To record payment of 15,000 pounds at $1.62 spot rate.
Solution P12-2
1. Entries on April 1
Accounts receivable (LCU) $33,060
Sales $33,060
To record sales on account denominated in LCUs:
200,000 LCUs / 6.0496 LCUs

Discount on forward contract 168
Contract payable (LCU) $33,060
To record forward contract for delivery in 60 days of
200,000 LCUs to the exchange broker:
200,000 LCUs / 6.019 LCUs
2. Entries on May 30
Cash (LCU) $33,378
Accounts receivable (LCU)
$33,060
Exchange gain 318
To record collection of receivable in LCUs:
200,000 LCUs / 5.992 LCUs
Contract payable (LCU) $33,060

Exchange loss 318
Cash $33,378
To record delivery of 200,000 LCUs to the exchange broker.
Cash $33,228
To record collection of amount due from exchange broker.

To record amortization.
Chapter 12 198
Solution P12-3
1 and 2 Exchange Gain

Per Books Balance Sheet or (Loss)
Accounts receivable
British pounds (100,000x1.660)$165,000 $166,000 $ 1,000
Euros (250,000x$.670) 165,000 167,500 2,500
Swedish krona (160,000x$.640) 105,600 102,400 (3,200)
Japanese yen (2,000,000x$.0076) 15,000 15,200 200
$450,600 $451,100 500
Accounts payable
Canadian dollars(150,000x$.69)$105,000 $103,500 $ 1,500
Swedish krona (220,000x$.135) 28,600 29,700 (1,100)
Japanese yen (4,500,000x$.0076) 33,300 34,200 (900)
$166,900 $167,400 ( 500)
Net exchange gain $ 0

Solution P12-4
November 16, 2006

Contract payable (pounds) $326,000
To record forward contract to sell 200,000 pounds for
delivery on February 14, 2007 at a forward rate of
$1.6300.
December 31, 2006

Loss on foreign exchange contract $ 1,000
Contract payable (pounds) $ 1,000
To adjust derivitive instrument to fair value at the
end of the fiscal year. (1.635-1.630) x 200,000 pounds.
Change in value of firm commitment $ 1,000

Gain on foreign exchange $ 1,000
To record the change in value of the underlying firm
commitment being hedged.
February 14, 2007

Cash (pounds) $666,000
Sales $666,000
To record sale of equipment for 400,000 pounds when the
spot rate for pounds is $1.6650.
Contract payable (pounds) $327,000

Loss on foreign exchange contract 6,000
Cash (pounds) $333,000
To record delivery of 200,000 pounds to the exchange
broker in settlement of the contract payable. Loss:
200,000 pounds x ($1.6650 - $1.6350).

Gain on foreign exchange contract $ 6,000
To record the change in value to the underlying firm
commitment being hedged.
Cash $326,000
To record collection of the contract price.
Sales $ 7,000
To adjust sales for the change in value of the firm
commitment.
Chapter 12 200
Solution P12-5
1 Freeport Ltd. - January 15, 2006
Cash (fc) $168,000

Exchange gain 1,000
To record receipt of 100,000 in settlement of
Freeport receivable: 100,000 x $1.68.

Exchange loss 1,000
Cash (fc) $168,000
To record delivery of 100,000 to the exchange broker
in settlement of the contract payable denominated in .
Cash $164,000
To record receipt of U.S. dollars from exchange broker
in settlement of the contract receivable.

To record amortization of remaining discount from hedge
($1,000 x 15/30 days).
2 Matsushita purchase - March 1, 2006

Cash $76,000
To record payment to exchange broker of contract
payable denominated in U.S. dollars.
Cash (fc) $75,000

Exchange loss 500
To record collection from exchange broker of receivable
denominated in yen (10,000,000 yen x $.00750 spot
rate).
Account payable (fc) $75,500

Cash (fc) $75,000
Exchange gain 500
To record payment to Matsushita of 10,000,000 yen in
settlement of account payable denominated in yen.
Amortization of premium $ 400

To amortize remaining premium ($600 x 60/90 days).
Chapter 12 202
Solution P12-6
1 Entry on October 2, 2003

Contract receivable (euros) $31,750
To record forward contract to purchase 50,000 euros at
$.6350 as a hedge of a firm commitment.
2 December 31, 2003 adjustment

Contract receivable (euros) $ 350
Exchange gain $ 350
To adjust the contract receivable for 50,000 euros to
the $.6420 future exchange rate at December 31, 2003:
50,000 euros x ($.6420 - $.6350).
Exchange loss $ 350

Change in value of firm commitment $ 350
To record the change in the value of the underlying
firm commitment hedged.
3 Entries on March 31, 2004

Cash $31,750
To pay exchange broker for 50,000 euros at the forward
rate of $.6350 established on October 2, 2003.
Cash (euros) $32,800

Contract receivable (euros) $32,100
Exchange gain 700
To record receipt of 50,000 euros from exchange broker
when spot rate is $.6560.
Exchange Loss $ 700

Change in value of firm commitment $ 700
To record the change in the value of the underlying
firm commitment hedged.
Purchases $32,800
Cash (euros) $32,800
To record purchase and payment in euros at $.6560 spot
rate.

Purchases 1,050
To record the adjustment of purchases for the change in
the value of the firm commitment. This effectively
fixes the purchase at the original forward rate.
Chapter 12 204
Solution P12-7
December 2, 2003
Contract Payable $840,000
To record forward contract for future delivery of 500,000
pounds to the exchange broker for $840,000
December 31, 2003

Other comprehensive income: exchange loss $10,000
Contract payable (fc) $ 10,000
To adjust liability at year-end for change in the
exchange rate.
March 1, 2004
Cash (fc) $860,000
Sales $860,000
To record delivery of equipment to Ramsay Ltd. and
collection of 500,000 pounds at the $1.72 spot rate.

Other comprehensive income: exchange loss 10,000
Cash (fc) $860,000
To record delivery of the 500,000 pounds to the
exchange broker to settle the contract payable.
Cash $840,000
To record collection of receivable from exchange broker
denominated in U.S. dollars.
Sales $ 20,000
Other comprehensive income: exchange loss $20,000
To adjust sales account for exchange loss and discount
on forward contract.
Solution P12-8
1 December 16, 2004

Equipment $668,000
To record purchase of equipment (400,000 pounds x
$1.67).

Premium on forward contract 4,000
To record hedge of an exposed net liability position.
Payable: 400,000 pounds x $1.68 forward rate
2 December 31, 2004

Accounts payable (fc) $ 8,000
To adjust accounts payable for currency exchange rate
change: 400,000 pounds x ($1.67 - $1.65).

Contract receivable (fc) $ 8,000
To adjust contract receivable denominated in pounds for
current exchange rate.
Amortization of premium $ 2,000

Premium on forward contract $ 2,000
To record amortization ($4,000 x 15/30 days).
3 January 15, 2005

Cash (fc) $656,000
Exchange loss 4,000
To record collection of pounds from exchange broker:
400,000 pounds x ($1.65 - $1.64) = $4,000 loss.

Cash $672,000
To record payment to exchange broker in dollars.

Cash (fc) $656,000
Exchange gain 4,000
To record payment of accounts payable in pounds.
Amortization of premium $ 2,000

Chapter 12 206
Premium on forward contract $ 2,000
To record amortization of premium ($4,000 x 15/30
days).
Solution P12-9
1 November 2, 2007
Sales $165,000
To record sale of hospital equipment to Salem Ltd. for
100,000 .

Discount on forward contract 1,200
To record contract to deliver 100,000 to the exchange
broker in 90 days.
2 December 31, 2007

Accounts receivable (fc) $ 1,000
To adjust account receivable denominated in to $1.660
exchange rate and recognize gain: ($1.660 - $1.650) x
100,000 .

Contracts payable (fc) $ 1,000
To adjust contract payable denominated in to the
$1.660 year-end exchange rate and recognize loss.

To record amortization of discount: $1,200 x 2/3 =$800.
3 January 30, 2008

Cash (fc) $166,500
Exchange gain 500
To record receipt of 100,000 from Salem Ltd. in
settlement of account receivable.

Exchange loss 500
Cash (fc) $166,500
To record delivery of 100,000 to exchange broker in
settlement of a contract payable denominated in .
Cash $163,800
To record collection from exchange broker.
Chapter 12 208

To record amortization of discount: $1,200 x 1/3 =$400.
Solution P12-10
1 Schedule of forward contract items at December 31, 2003
Balance Sheet
Amount
Current assets
Contract receivable [Bennett hedge: in U.S. dollars] $168,000
Contract receivable [Toyaki hedge: 10,000,000 x $.0077] 77,000
Contract receivable [Speculation in euros: 200,000 x $.670
60-day forward exchange rate] 134,000
Change in value of firm commitment 1,000
Deferred charges
Premium on forward contract-Toyaki [$1,000 x 60/120 days] $ 500
Current liabilities
Accounts payable [Toyaki account: 10,000,000 x $.0077] $ 77,000
Contract payable [Bennett hedge: 100,000 pounds x $1.690] 169,000
Contract payable [Speculation in euros: payable denominated
in U.S. dollars] 130,000
2 Exchange gain or loss for 2003
Toyaki: $2,000 loss on account payable offset by $2,000

gain on contract receivable $ 0
Bennett: Exchange loss is offset by the change in the
Value of the firm commmitment 0
Speculation: The speculation is accounted for at the forward
rate throughout the life of the contract. Therefore, the
contract receivable is adjusted to $134,000 (the rate for
60-day futures at December 31 and the $4,000 gain is
recognized) 4,000
Exchange gain for 2003 appearing in income statement $ 4,000
Chapter 12 210
Solution P12-11
Grandview International
Adjusted Forward Contract Accounts
at December 31, 2008
Current assets:
Accounts receivable [Notor: 100,000 Krona x $.23] $ 23,000
Contract receivable [Notor hedge: in U.S. dollars] 21,000
Contract receivable [Cheil hedge: 10,000,000 won x$.0014]14,000
Contract receivable [Sterling hedge: 10,000 Canadian
dollars x $.81] 8,100
$ 66,100
Deferred charges:
Discount on forward contract-Notor [$1,000 x 30/60 days] $ 500
Premium on forward contract-Cheil [$1,000 x 60/120 days] 500
Change in value of firm commitment 200
$ 1,200
Current liabilities:
Accounts payable [Cheil: 10,000,000 won x $.0014] $ 14,000
Contract payable [Notor: 100,000 Krona x $.23] 23,000
Contract payable [Cheil hedge: in U.S. dollars] 13,000
Contract payable [Sterling hedge: in U.S. dollars] 8,400
$ 58,400
1 $21,000 [The contract receivable is denominated in U.S.

dollars.]
2 $14,000 and $14,000 [The contract receivable and account

payable are both denominated in South Korean won and
therefore they will be adjusted to the current exchange rate
for won at December 31.]
3 The contract receivable for the Sterling hedge is

denominated in Canadian dollars and is therefore adjusted to
fair value at year-end at the forward (30 dayto end of
contract) exchange rate of $.82. An increase in the value of
the firm commitment underlying this hedge must also be
recorded. This gain would offset the loss on the contract.

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178 Foreign Currency Concepts and Transactions

FOREIGN CURRENCY CONCEPTS AND TRANSACTIONS

1 A transaction is measured in a particular currency if its magnitude is

2 A Canadian dollar is a foreign currency from the viewpoint of a U.S.

3 Direct quotation: .72/1 = $.72

4 Official or fixed rates are set by a government and do not change as a

6 The transaction is a foreign transaction because it involves import

7 At the transaction date, assets and liabilities denominated in foreign

9 Exchange gains and losses on foreign currency transactions are reflected in

11 A forward exchange contract (or futures contract) is an agreement to

12 The purpose of the derivative contract is to mitigate or eliminate potential

13 A hedge against an identifiable foreign currency commitment fixes the

1 The dollar weakened against the yen.

2 10,000,000 yen x $.0075 = $75,000

3 Accounts payable $75,000

4 Zimmer would have entered a contract to purchase yen for

December 16, 2003

December 31, 2003

January 15, 2004

Adjustment in value of account receivable for 2005:

Adjustment in value of account receivable at settlement in 2006:

May 30, 2003

Solution E12-6 [AICPA adapted]

1 c On December 31, 2007 Bain received payment of 300,000

2 d On December 31, 2004 Yumi Corp. adjusts its account

3 d December 31, 2004 note payable $240,000

4 d Note receivable December 31, 2003 $140,000

2. Exchange gain or loss in 2004:

To record purchase of inventory items denominated in

Contract receivable (LCU) $16,500

To record purchase of 100,000 LCUs for delivery in 90

May 30, 2008

To record receipt of 100,000 LCUs from the exchange

Contract payable $16,500

To record settlement of forward contract with the

Accounts payable (LCU) $16,300

To record payment to Cavilier of 100,000 LCUs. Gain:

1 The exchange loss on the account payable denominated in LCU will

2 The income effect in 2009 will be amortization of the premium on

1 d Imp's contract with the exchange broker is for the

2 a In accounting for a hedge of a foreign currency

3 b The speculation is valued at the forward rate

British pounds 50,000 $1.67 $ 83,500 $(1,500)

October 19, 2008

Contract receivable $66,900

Contract payable (fc) $35,250

To record forward contract to sell 50,000 Canadian

May 31, 2009

To record sale of fittings to Windsor for 50,000

Contract payable (fc) $35,250

To record payment of the contract denominated in

To record receipt of the $35,250 from the exchange

To reclassify exchange loss on forward contract as an

1 Entry on November 2 for contract with the exchange broker:

Contract receivable (fc) $7,800

2 No journal entry needed as the 30day future rate at the end

December 31, 2003

March 31, 2004

4 Settlement of accounts payable:

Accounts payable $ 6,850

Accounts payable (Canadian $) $ 7,000

Accounts payable (pounds) $24,750

Contract receivable $33,228