Professional Documents
Culture Documents
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Learning Objective 1
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In the case of transactions between business entities of different countries, the amounts receivable and payable are denominated in local currency of either the buying or the selling entity.
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.0082
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Learning Objective 2
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The Euro
Twelve member states of the European Union chose to participate in the transition to a single currency for Europe, the Euro.
The euro currency is managed by the European Central Bank.
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Learning Objective 3
Accounts payable (fc) 7,000 Exchange Gain 100 Cash 6,900 (Cash required equals 10,000 Canadian dollars the $0.69 spot rate)
To record collection in full from Kimetz (20,000 euros $0.6700) and recognize exchange gain for 2009 [20,000 euros ($0.6700 $0.6650)]
13,450 50 13,400
Learning Objective 4
Comprehend cash flow hedge accounting and fair value hedge accounting.
Derivative Instruments
Options contracts
Forward contracts
Future contracts
2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 12 - 25
Derivative Instruments
Options are rights to take an action, but the holder is not obligated to do so.
A forward contract is negotiated between the parties and not through an exchange.
Derivative Instruments
Futures contracts bind both parties (the writer and the holder) to perform.
A cash flow hedge is designed to limit the companys exposure to price changes in forecasted purchases.
2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 12 - 27
Derivative Instruments
A company signs an option contract on January 15, 2003, at a cost of $1,000. The company can exercise its option to purchase 100,000 gallons of fuel at $1 per gallon. The option expires on May 31, 2003.
Derivative Instruments
January 15, 2003 Fuel Contract Option 1,000 Cash 1,000 The company prepares its quarterly report on March 31, 2003. Market price of fuel is $1.25. The company could exercise the option on this date.
2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 12 - 29
Derivative Instruments
March 31, 2003 Fuel Contract Option Other Comprehensive Income Unrealized Holding Gains on Fuel Option Contract 24,000
24,000
On May 31, 2003, the fuel price is $1.30. The writer of the option must pay the company $0.30 per gallon, or $30,000.
2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 12 - 30
Derivative Instruments
May 31, 2003 Fuel Inventory Cash
130,000
130,000
25,000 5,000
Derivative Instruments
The fuel inventory is used on June 15, 2003.
June 15, 2003 Cost of Goods Sold Fuel Inventory Other Comprehensive Income Cost of Goods Sold 130,000 130,000 30,000
30,000
A fair value hedge is a derivative contract that attempts to reduce the price risk of an existing asset or firm purchase commitment.
Learning Objective 5
Speculation
Exchange gains or losses on derivative instruments that speculate in foreign currency price movements are included in income in the period in which the forward exchange rates change.
Speculation
On November 2, 2007, U.S. International enters into a 90-day forward contract (future) to purchase 10,000 euros (). The current quotation for 90-day futures is 5,400. The spot rate for euros on November 2 is $0.5440.
Speculation
December 31, 2007 January 30, 2008
30-day futures Spot rate $0.5450 $0.5500 $0.5480 $0.5530
What are the journal entries of U.S. International to account for the speculation?
2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 12 - 44
Speculation
November 2, 2007 Contract Receivable (fc) 5,400 Contract Payable 5,400 To record contract for 10,000 euros $0.5400 exchange rate for 90-day futures
Speculation
December 31, 2007 Contract Receivable (fc) 50 Exchange Gain 50 To adjust receivable from exchange broker and recognize exchange gain 10,000 euros ($0.5450 forward exchange rate for 30-day futures $0.5400 per books)
2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 12 - 46
End of Chapter 12