Advanced Accounting
12th Edition
ISBN: 9781305084858
Author: Paul M. Fischer, William J. Tayler, Rita H. Cheng
Publisher: Cengage Learning
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Chapter 10, Problem 10.2P
To determine
Forward Contract: Forward contract is the contract entered by two private parties to buy/sell a given commodity, foreign currency at a specified rate.
Fair Value Hedge: Fair value hedge accounting is accounting for hedges based on changes in fair value of assets or liabilities.
To identify: The accounts and balances in income statements and
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Kaiser Exporters buys used medical equipment and sells it to various foreign health care institutions. On June 15, the company committed to sell medical equipment to a foreign hospital for 800,000 FC. The equipment, with a cost of $325,000, was shipped to the customer on August 15 with terms FOB shipping point and payment due on October 15. At the time of the commitment, Kaiser acquired a forward contract to sell 800,000 FC in 120 days. Selected spot and forward rates are as follows:
June 15
Spot rate ........................... $0.500
Forward rate ........................ 0.510
June 30
Spot - $0.485
Forward - 0.490
August 15
Spot - $0.480
Forward - 0.475
September 30
Spot - $0.470
Forward - 0.468
June 15
Spot rate ........................... $0.500
Forward rate ........................ 0.510
June 30
Spot - $0.485
Forward - 0.490
August 15
Spot - $0.480
Forward - 0.475
September 30
Spot - $0.470
Forward - 0.468
Clayton Industries sells medical equipment worldwide. On March 1 of the current year, the company sold equipment, with a cost of $160,000, to a foreign customer for 200,000 euros payable in 60 days. At the same time, the company purchased a forward contract to sell 200,000 euros in 60 days. In another transaction, the company committed, on March 15, to deliver equipment in May to a foreign customer in exchange for 300,000 euros payable in June. This equipment is anticipated to have a completed cost of $210,000. On March 15, the company hedged the commitment by acquiring a forward contract to sell 300,000 euros in 90 days. Changes in the value of the commitment are based on changes in forward rates, and all discounting is based on a 6% discount rate. Assume all hedges are accounted for as fair value hedges and that the spot-forward difference is included in the assessment of hedge effectiveness. Various spot and forward rates for the euro are as follows:
Spot Rate
Forward Rate for…
Brandlin Company of Anaheim, California, purchases materials from a foreign supplier on December 1, 2017, with payment of 32,000 korunas to be made on March 1, 2018. The materials are consumed immediately and recognized as cost of goods sold at the date of purchase. On December 1, 2017, Brandlin enters into a forward contract to purchase 32,000 korunas on March 1, 2018. Relevant exchange rates for the koruna on various dates are as follows:
Date
Spot Rate
Forward Rate(to March 1, 2018)
December 1, 2017
$
5.00
$
5.075
December 31, 2017
5.10
5.200
March 1, 2018
5.25
N/A
Brandlin’s incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent (1 percent per month) is 0.9803. Brandlin must close its books and prepare financial statements at December 31.
a-1. Assuming that Brandlin designates the forward contract as a cash flow hedge of a foreign currency payable and recognizes any…
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