19. On November 1, 20X8 Desket, Inc. a U.S. company agreed to sell goods to a foreign buyer for 200,000 FC. The goods were to be shipped on December 1 with payment to be received

29 Jun 19. On November 1, 20X8 Desket, Inc. a U.S. company agreed to sell goods to a foreign buyer for 200,000 FC. The goods were to be shipped on December 1 with payment to be received

Question
15. On November 1, 20X1, a U.S. company purchased inventory from a foreign supplier for 100,000 FCs, with payment to be made on January 31, 20X2, in FCs. To hedge against fluctuations in exchange rates, the firm entered into a forward exchange contract on November 1 to purchase 100,000 FCs on January 31, 20X2. The U.S. firm has a December 31 year end for accounting purposes. The following exchange rates may apply:

Date

Spot Rate

Fwd Rate

11/1/X1……………………………

$0.15

$0.13

12/31/X1…………………………..

$0.16

$0.14

1/31/X2……………………………

$0.165

$0.165

Discount rate = 12%

Required:

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Make all the necessary journal entries for the U.S. firm relative to these events occurring between November 1, 20X1, and January 31, 20X2.

16. On November 1, 20X1, a U.S. company sold merchandise to a foreign firm for 100,000 FCs with payment to be made on January 31, 20X2, in FCs. To hedge against fluctuations in exchange rates, the firm entered into a forward exchange contract on December 1, 20X1 to sell 100,000 FCs on January 31, 20X2. The U.S. firm has a December 31 year end for accounting purposes. The following exchange rates may apply:

Date

Spot Rate

Fwd Rate

11/1/X1…………………………..

$0.15

$0.17

12/1/X1…………………………..

$0.155

12/31/X1………………………….

$0.16

$0.175

1/31/X2…………………………..

$0.165

$0.165

Discount rate = 10%

Required:

Make all the necessary journal entries for the U.S. firm relative to these events occurring between November 1, 20X1, and January 31, 20X2.

17. Zerlie’s Imports purchased automotive parts from a German firm on July 1, 20X1. The parts cost 150,000 Euros to be paid for on August 15. To pay for the parts, Zerlie’s Imports borrowed 150,000 euros from a German bank on July 16. The loan bears an 11% interest rate to be repaid on August 15 in euros.

Another option would have been for Zerlie’s to have hedged the purchase with a forward exchange contract on July 1 to buy 150,000 euros at a forward rate of $0.67. Exchange rates were as follows:

Date

Spot Rate

July 1, 20X1………………………………

1

M = $0.65

July 16, 20X1……………………………..

1

M = $0.60

August 15, 20X1……………………………

1

M = $0.62

Required:

a. Compute the effect on net income assuming the following:

(1) Zerlie did not borrow to pay for the transaction or hedge the transaction on July 1.

(2) Zerlie borrowed from the German bank on July 16.

(3) Zerlie hedged the full purchase on July 1.

**ignore present values and discount rates

b. Determine which of these three alternatives would have been the best for Zerlie under the situation described.

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18. Bulldog Enterprise, a U.S. firm, agreed on February 1, 20X1, to buy gears from a Mexican firm for 75,000 pesos. Delivery is scheduled for April 1, 20X1, with payment due on May 1, 20X1. On February 1, 20X1, Bulldog also acquired a forward contract to buy 75,000 pesos on May 1, 20X1. (The gears represent inventory to the U.S. firm.) There are no fiscal period ends.

Required:

Prepare the journal entries necessary for Bulldog Enterprise to record this activity. Assume that the following exchange rates existed:

Date

Spot Rate

Forward Rate

February 1, 20X1……..

1

peso = $0.223

1

peso = $0.227

April 1, 20X1………..

1

peso = $0.228

1

peso = $0.230

May 1, 20X1………….

1

peso = $0.226

1

peso = $0.226

Discount rate = 15%

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19. On November 1, 20X8 Desket, Inc. a U.S. company agreed to sell goods to a foreign buyer for 200,000 FC. The goods were to be shipped on December 1 with payment to be received January 31, 20X9.

The hedging contract, signed on November 1, 20X8, called for the sale of 200,000 FC on January 31, 20X9. Assume the December 31 is fiscal year end. Exchange rates are as follows:

…………………..

11/1/X8

Spot Rate

Fwd Rate

$0.66
$0.69

12/1/X8 …………………..

$0.67

$0.68

12/31/X8 ………………….

$0.65

$0.66

Discount rate = 12%

Required:

Prepare all necessary entries through December 31, 20X8 for the commitment hedge and sale.

20. Red & Blue Company, a U.S. corporation, agreed to purchase merchandise from a British vendor on January 1, 20X4. The goods will be shipped on January 31, 20X4 and payment of 200,000 British pounds is due February 28, 20X4. On January 1, USA signed an agreement with a foreign exchange broker to buy 200,000 British pounds on February 28, 20X4. Exchange rates to purchase 1 British pound are as follows:

………………

1/1/X4

Spot Rate

Fwd Rate

$1.65
$1.63

1/31/X4……………..

$1.62

$1.605

2/28/X4……………..

$1.59

$1.59

Discount Rate = 15%

Required:

Journalize these transactions.

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21. On January 1, 20X4, Branson Company, a U.S. corporation, purchased lab equipment from a Japanese vendor for 1,000,000 FC. The 1,000,000 FC is to be paid on March 31, 20X4. On February 1 the company purchased a forward contract to buy foreign currency which would expire on March 31, 20X4. The contract was to purchase 1,000,000 FC.

Exchange Rates are as follows: