25 Aug Journal Entries (Ricky and Potatoes)
Journal Entries (Ricky and Potatoes)
- Assumes that Ricky Corporation (Ricky) normally sells goods in France and therefore has a stream of income which is denominated in Euros. Ricky enters into a master agreement with a bank to convert this future stream of Euros into US dollars. Determine whether this agreement is considered a derivative under both the US GAAP and under the IFRS. Support your decision with reference(s) to the appropriate literature issued by both standard setters.
- The Potato Company (Potato) produces frozen French fries and therefore uses potatoes as the major raw material in its manufacturing process. Potato enters a forward exchange contract to purchase 20 bushels of potatoes in 30 days for $1,200. The contract has a net settlement provision.
Part 1: Assume that the potatoes are worth $1,250 at the end of 30 days. Explain in detail how the forward exchange contract might or would be settled in 30 days? What are Potato’s options with respect to the forward exchange contract?
Part 2: Assume that potatoes are not easily convertible into cash and that Potato has a history of taking delivery of the potatoes under these types of contracts (gross settlement). Potato has decided NOT to document the instrument as a normal purchase and sales contract. Prepare the journal entries required under both the US GAAP and IFRS separately, with detailed explanations of the basis for each dollar journal entry amount, and a detailed journal entry explanation with appropriate reference(s) to the accounting literature for both standard-setters for each respective journal entry.
Requirements:
- Write a paper of 4 pages in length, not counting the title and reference pages, which you must include.
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