Forward Exchange Contract: A forward exchange contract shows exchange rates for selected major international currencies for one month, three months, and six months forward contracts. An active dealer market is available for companies willing to transact in foreign currencies. The forward rate on a date is not the same as the spot rate. The difference between spot and the forward rate is known as the spread. The spread gives information about the strength or weakness of currencies. The entries to record the purchase of equipment, assuming forward contract is not designed as a hedge, but is entered into manage the company’s foreign currency exposure and also determine effect of these transactions on financial statements.

Question

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Answer 1

Question

Chapter 11, Problem 11.10E

Part I

To determine

Introduction:

Forward Exchange Contract: A forward exchange contract shows exchange rates for selected major international currencies for one month, three months, and six months forward contracts. An active dealer market is available for companies willing to transact in foreign currencies. The forward rate on a date is not the same as the spot rate. The difference between spot and the forward rate is known as the spread. The spread gives information about the strength or weakness of currencies.

The entries to record the purchase of equipment, assuming forward contract is not designed as a hedge, but is entered into manage the company’s foreign currency exposure and also determine effect of these transactions on financial statements.

Part I

Expert Solution

Answer to Problem 11.10E

Net effect on income $700

Explanation of Solution

a. entries

Date	Particular	Debit $	Credit $
12/16/20X7	Equipment	95,200
	Accounts payable		95,200
	(Purchase of equipment payable in Swiss franc)

	Foreign currency receivable from broker	93,800
	Dollars payable to exchange broker		93,800
	(Signed a forward exchange contract for 60 days)

12/31/X7	Foreign currency transaction loss	2,800
	Accounts payable		2,800
	(Exchange transaction loss recognized on revaluation of payable)

	Foreign currency receivable form broker	3,500
	Foreign currency transaction gain		3,500
	(Foreign currency gain on revaluation recognized on December 31)

02/14/20X8	Foreign currency transaction loss	700
	Foreign currency receivable from broker		700
	(Loss on revaluation of February recognized)

	Accounts payable	1,400
	Foreign currency transaction gain		1,400
	(Revaluation of foreign currency accounts payable)

	Dollars payable to exchange broker	93,800
	Cash		93,800
	(Paid U.S dollars to exchange broker for forward contract)

	Foreign currency units	96,600
	Foreign currency receivable from exchange broker		96,600
	(Received francs from exchange broke recognized in U.S. dollar)

	Accounts payable	96,600
	Foreign currency units		96,600
	(Settlement of foreign currency payable)

Exchange of equipment value at purchase

$95,200 = SFr 140,000 × $.68

Foreign currency receivable from broker

$93,800 = SFr 140,000 × $.67

Revaluation of accounts payable to current U.S. dollars:

SFr 140,000 × $.70 Dec. 31 spot	$98,000
SFr 140,000 × $.68 Dec. 16 spot	($95,200)
	$2,800

Revaluation of foreign currency receivable:

SFr 140,000 × $.695 Dec. 31 spot	$97,300
SFr 140,000 × $.67 Dec. 16 spot	($93,800)
	$3,500

Revaluation of foreign currency receivable to current equivalent U.S. dollar:

SFr 140,000 × $.69 Feb. 14 spot	$96,600
SFr 140,000 × $.695 Dec. 31 spot	($97,300)
	$700

Revaluation of foreign currency accounts payable to current U.S. dollars:

SFr 140,000 × $.69 Feb. 14 spot	$96,600
SFr 140,000 × $.70 Dec. 31 spot	($98,000)
	$1,400

Receipt of Francs from exchange broker

$96,600 = SFr 140,000 × $.69 spot

b. Effect on income statement

	$
Foreign currency exchange loss (with Swiss co)	(2,800)
Foreign currency exchange gain ( with broker)	3,500
Net effect on income	700

c. Overall effect of transaction

	$
Foreign exchange gain 20X7	700
Foreign exchange loss on receivable 20X8	(700)
Foreign exchange transaction gain on payable 20X8	1,400
Overall effect	1,400

Part II

To determine

Introduction:

Forward Exchange Contract: A forward exchange contract shows exchange rates for selected major international currencies for one month, three months, and six months forward contracts. An active dealer market is available for companies willing to transact in foreign currencies. The forward rate on a date is not the same as the spot rate. The difference between spot and the forward rate is known as the spread. The spread gives information about the strength or weakness of currencies.

The entries assuming the forward contract is designed as a cash flow hedge for variability of future cash flows from the foreign currency accounts payable.

Part II

Expert Solution

Explanation of Solution

Date	Particular	Debit $	Credit $
12/16/20X7	Equipment	95,200
	Accounts payable		95,200
	(Purchase of equipment payable in Swiss franc)

	Foreign currency receivable from broker	93,800
	Dollars payable to exchange broker		93,800
	(Signed a forward exchange contract for 60 days)

12/31/X7	Foreign currency transaction loss	2,800
	Accounts payable		2,800
	(Exchange transaction loss recognized on revaluation of payable)

	Foreign currency receivable form broker	3,500
	Other comprehensive income		3,500
	(Foreign currency gain on revaluation recognized on December 31)

	Other comprehensive income	2,800
	Foreign currency transaction gain		2,800
	(Offset of foreign currency transaction loss on revaluation)

02/14/20X8	Other comprehensive income	700
	Foreign currency receivable from broker		700
	(Loss on revaluation of February recognized)

	Accounts payable	1,400
	Foreign currency transaction gain		1,400
	(Revaluation of foreign currency accounts payable)

	Foreign currency transaction loss	1,400
	Other comprehensive income		1,400
	(Offset of foreign currency transaction gain)

	Dollars payable to exchange broker	93,800
	Cash		93,800
	(Paid U.S dollars to exchange broker for forward contract)

	Foreign currency units	96,600
	Foreign currency receivable from Exchange broker		96,600
	(Received francs from exchange broke recognized in U.S. dollar)

	Accounts payable	96,600
	Foreign currency units		96,600
	(Settlement of foreign currency payable)

Exchange of equipment value at purchase

$95,200 = SFr 140,000 × $.68

Foreign currency receivable from broker

$93,800 = SFr 140,000 × $.67

Revaluation of accounts payable to current U.S. dollars:

SFr 140,000 × $.70 Dec. 31 spot	$98,000
SFr 140,000 × $.68 Dec. 16 spot	($95,200)
	$2,800

Revaluation of foreign currency receivable:

SFr 140,000 × $.695 Dec. 31 spot	$97,300
SFr 140,000 × $.67 Dec. 16 spot	($93,800)
	$3,500

Revaluation of foreign currency receivable to current equivalent U.S. dollar:

SFr 140,000 × $.69 Feb. 14 spot	$96,600
SFr 140,000 × $.695 Dec. 31 spot	($97,300)
	$700

Revaluation of foreign currency accounts payable to current U.S. dollars:

SFr 140,000 × $.69 Feb. 14 spot	$96,600
SFr 140,000 × $.70 Dec. 31 spot	($98,000)
	$1,400

Receipt of Francs from exchange broker

$96,600 = SFr 140,000 × $.69 spot

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Students have asked these similar questions

On December 12, year 11, Imp Co. entered into three forward exchange contracts, each to purchase 100,000 LCU's in 90 days. The relevant exchange rates are as follows:Spot rate Forward rate(for March 12, year 12)December 12, year 11 $0.88 $0.90December 31, year 11 $0.98 $0.93Imp entered into the second forward contract to hedge a commitment to purchase equipment being manufactured to Imp specifications. At December 31, 2022, what amount of foreign currency transaction gain should Imp include in income from this forward contract?a. $0b. $3,000c. $5,000d. $10,000

On December 12, 20X5, Dahl Company entered into three forward exchange contracts, each to purchase 100,000 francs in 90 days. The relevant exchange rates are as follows: Spot Rate Forward Rate for March 12, 20X6 December 12, 20X5 $ 0.88 $ 0.90 December 31, 20X5 0.98 0.93 1. The following information applies to Denton Incorporated’s sale of 10,000 foreign currency units under a forward contract dated November 1, 20X5, for delivery on January 31, 20X6: 11/1/X5 12/31/X5 Spot rates $ 0.80 $ 0.83 30-day forward rate 0.79 0.82 90-day forward rate 0.78 0.81 1. Denton entered into the forward contract to speculate in the foreign currency. In its income statement for the year ended December 31, 20X5, what amount of loss should Denton report from this forward contract? multiple choice $400 $300 $200 $0 2. On September 1, 20X5, Johnson Incorporated entered into a foreign exchange contract for speculative purposes by purchasing €50,000 for…

On October 1, 2021, A Corp. purchased goods from US based corporation worth 60,500 US dollars. Payment is due in 120 days on January 30, 2022. In view of the transaction, Active Corp. entered into a forward contract to buy 60,500 US dollars from PNB in 120 days. The relevant rates are as follows: 10/01/21 12/31/21 01/30/22 Spot rate P 53 P 55 P 53.50 Forward rate 54 56.50 55How much is the net forex loss on settlement date?

Answer 2

Question

Chapter 11, Problem 11.10E

Part I

To determine

Introduction:

Forward Exchange Contract: A forward exchange contract shows exchange rates for selected major international currencies for one month, three months, and six months forward contracts. An active dealer market is available for companies willing to transact in foreign currencies. The forward rate on a date is not the same as the spot rate. The difference between spot and the forward rate is known as the spread. The spread gives information about the strength or weakness of currencies.

The entries to record the purchase of equipment, assuming forward contract is not designed as a hedge, but is entered into manage the company’s foreign currency exposure and also determine effect of these transactions on financial statements.

Part I

Expert Solution

Answer to Problem 11.10E

Net effect on income $700

Explanation of Solution

a. entries

Date	Particular	Debit $	Credit $
12/16/20X7	Equipment	95,200
	Accounts payable		95,200
	(Purchase of equipment payable in Swiss franc)

	Foreign currency receivable from broker	93,800
	Dollars payable to exchange broker		93,800
	(Signed a forward exchange contract for 60 days)

12/31/X7	Foreign currency transaction loss	2,800
	Accounts payable		2,800
	(Exchange transaction loss recognized on revaluation of payable)

	Foreign currency receivable form broker	3,500
	Foreign currency transaction gain		3,500
	(Foreign currency gain on revaluation recognized on December 31)

02/14/20X8	Foreign currency transaction loss	700
	Foreign currency receivable from broker		700
	(Loss on revaluation of February recognized)

	Accounts payable	1,400
	Foreign currency transaction gain		1,400
	(Revaluation of foreign currency accounts payable)

	Dollars payable to exchange broker	93,800
	Cash		93,800
	(Paid U.S dollars to exchange broker for forward contract)

	Foreign currency units	96,600
	Foreign currency receivable from exchange broker		96,600
	(Received francs from exchange broke recognized in U.S. dollar)

	Accounts payable	96,600
	Foreign currency units		96,600
	(Settlement of foreign currency payable)

Exchange of equipment value at purchase

$95,200 = SFr 140,000 × $.68

Foreign currency receivable from broker

$93,800 = SFr 140,000 × $.67

Revaluation of accounts payable to current U.S. dollars:

SFr 140,000 × $.70 Dec. 31 spot	$98,000
SFr 140,000 × $.68 Dec. 16 spot	($95,200)
	$2,800

Revaluation of foreign currency receivable:

SFr 140,000 × $.695 Dec. 31 spot	$97,300
SFr 140,000 × $.67 Dec. 16 spot	($93,800)
	$3,500

Revaluation of foreign currency receivable to current equivalent U.S. dollar:

SFr 140,000 × $.69 Feb. 14 spot	$96,600
SFr 140,000 × $.695 Dec. 31 spot	($97,300)
	$700

Revaluation of foreign currency accounts payable to current U.S. dollars:

SFr 140,000 × $.69 Feb. 14 spot	$96,600
SFr 140,000 × $.70 Dec. 31 spot	($98,000)
	$1,400

Receipt of Francs from exchange broker

$96,600 = SFr 140,000 × $.69 spot

b. Effect on income statement

	$
Foreign currency exchange loss (with Swiss co)	(2,800)
Foreign currency exchange gain ( with broker)	3,500
Net effect on income	700

c. Overall effect of transaction

	$
Foreign exchange gain 20X7	700
Foreign exchange loss on receivable 20X8	(700)
Foreign exchange transaction gain on payable 20X8	1,400
Overall effect	1,400

Part II

To determine

Introduction:

Forward Exchange Contract: A forward exchange contract shows exchange rates for selected major international currencies for one month, three months, and six months forward contracts. An active dealer market is available for companies willing to transact in foreign currencies. The forward rate on a date is not the same as the spot rate. The difference between spot and the forward rate is known as the spread. The spread gives information about the strength or weakness of currencies.

The entries assuming the forward contract is designed as a cash flow hedge for variability of future cash flows from the foreign currency accounts payable.

Part II

Expert Solution

Explanation of Solution

Date	Particular	Debit $	Credit $
12/16/20X7	Equipment	95,200
	Accounts payable		95,200
	(Purchase of equipment payable in Swiss franc)

	Foreign currency receivable from broker	93,800
	Dollars payable to exchange broker		93,800
	(Signed a forward exchange contract for 60 days)

12/31/X7	Foreign currency transaction loss	2,800
	Accounts payable		2,800
	(Exchange transaction loss recognized on revaluation of payable)

	Foreign currency receivable form broker	3,500
	Other comprehensive income		3,500
	(Foreign currency gain on revaluation recognized on December 31)

	Other comprehensive income	2,800
	Foreign currency transaction gain		2,800
	(Offset of foreign currency transaction loss on revaluation)

02/14/20X8	Other comprehensive income	700
	Foreign currency receivable from broker		700
	(Loss on revaluation of February recognized)

	Accounts payable	1,400
	Foreign currency transaction gain		1,400
	(Revaluation of foreign currency accounts payable)

	Foreign currency transaction loss	1,400
	Other comprehensive income		1,400
	(Offset of foreign currency transaction gain)

	Dollars payable to exchange broker	93,800
	Cash		93,800
	(Paid U.S dollars to exchange broker for forward contract)

	Foreign currency units	96,600
	Foreign currency receivable from Exchange broker		96,600
	(Received francs from exchange broke recognized in U.S. dollar)

	Accounts payable	96,600
	Foreign currency units		96,600
	(Settlement of foreign currency payable)

Exchange of equipment value at purchase

$95,200 = SFr 140,000 × $.68

Foreign currency receivable from broker

$93,800 = SFr 140,000 × $.67

Revaluation of accounts payable to current U.S. dollars:

SFr 140,000 × $.70 Dec. 31 spot	$98,000
SFr 140,000 × $.68 Dec. 16 spot	($95,200)
	$2,800

Revaluation of foreign currency receivable:

SFr 140,000 × $.695 Dec. 31 spot	$97,300
SFr 140,000 × $.67 Dec. 16 spot	($93,800)
	$3,500

Revaluation of foreign currency receivable to current equivalent U.S. dollar:

SFr 140,000 × $.69 Feb. 14 spot	$96,600
SFr 140,000 × $.695 Dec. 31 spot	($97,300)
	$700

Revaluation of foreign currency accounts payable to current U.S. dollars:

SFr 140,000 × $.69 Feb. 14 spot	$96,600
SFr 140,000 × $.70 Dec. 31 spot	($98,000)
	$1,400

Receipt of Francs from exchange broker

$96,600 = SFr 140,000 × $.69 spot

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Answer 3

Question

Chapter 11, Problem 11.10E

Part I

To determine

Introduction:

Forward Exchange Contract: A forward exchange contract shows exchange rates for selected major international currencies for one month, three months, and six months forward contracts. An active dealer market is available for companies willing to transact in foreign currencies. The forward rate on a date is not the same as the spot rate. The difference between spot and the forward rate is known as the spread. The spread gives information about the strength or weakness of currencies.

The entries to record the purchase of equipment, assuming forward contract is not designed as a hedge, but is entered into manage the company’s foreign currency exposure and also determine effect of these transactions on financial statements.

Part I

Expert Solution

Answer to Problem 11.10E

Net effect on income $700

Explanation of Solution

a. entries

Date	Particular	Debit $	Credit $
12/16/20X7	Equipment	95,200
	Accounts payable		95,200
	(Purchase of equipment payable in Swiss franc)

	Foreign currency receivable from broker	93,800
	Dollars payable to exchange broker		93,800
	(Signed a forward exchange contract for 60 days)

12/31/X7	Foreign currency transaction loss	2,800
	Accounts payable		2,800
	(Exchange transaction loss recognized on revaluation of payable)

	Foreign currency receivable form broker	3,500
	Foreign currency transaction gain		3,500
	(Foreign currency gain on revaluation recognized on December 31)

02/14/20X8	Foreign currency transaction loss	700
	Foreign currency receivable from broker		700
	(Loss on revaluation of February recognized)

	Accounts payable	1,400
	Foreign currency transaction gain		1,400
	(Revaluation of foreign currency accounts payable)

	Dollars payable to exchange broker	93,800
	Cash		93,800
	(Paid U.S dollars to exchange broker for forward contract)

	Foreign currency units	96,600
	Foreign currency receivable from exchange broker		96,600
	(Received francs from exchange broke recognized in U.S. dollar)

	Accounts payable	96,600
	Foreign currency units		96,600
	(Settlement of foreign currency payable)

Exchange of equipment value at purchase

$95,200 = SFr 140,000 × $.68

Foreign currency receivable from broker

$93,800 = SFr 140,000 × $.67

Revaluation of accounts payable to current U.S. dollars:

SFr 140,000 × $.70 Dec. 31 spot	$98,000
SFr 140,000 × $.68 Dec. 16 spot	($95,200)
	$2,800

Revaluation of foreign currency receivable:

SFr 140,000 × $.695 Dec. 31 spot	$97,300
SFr 140,000 × $.67 Dec. 16 spot	($93,800)
	$3,500

Revaluation of foreign currency receivable to current equivalent U.S. dollar:

SFr 140,000 × $.69 Feb. 14 spot	$96,600
SFr 140,000 × $.695 Dec. 31 spot	($97,300)
	$700

Revaluation of foreign currency accounts payable to current U.S. dollars:

SFr 140,000 × $.69 Feb. 14 spot	$96,600
SFr 140,000 × $.70 Dec. 31 spot	($98,000)
	$1,400

Receipt of Francs from exchange broker

$96,600 = SFr 140,000 × $.69 spot

b. Effect on income statement

	$
Foreign currency exchange loss (with Swiss co)	(2,800)
Foreign currency exchange gain ( with broker)	3,500
Net effect on income	700

c. Overall effect of transaction

	$
Foreign exchange gain 20X7	700
Foreign exchange loss on receivable 20X8	(700)
Foreign exchange transaction gain on payable 20X8	1,400
Overall effect	1,400

Part II

To determine

Introduction:

Forward Exchange Contract: A forward exchange contract shows exchange rates for selected major international currencies for one month, three months, and six months forward contracts. An active dealer market is available for companies willing to transact in foreign currencies. The forward rate on a date is not the same as the spot rate. The difference between spot and the forward rate is known as the spread. The spread gives information about the strength or weakness of currencies.

The entries assuming the forward contract is designed as a cash flow hedge for variability of future cash flows from the foreign currency accounts payable.

Part II

Expert Solution

Explanation of Solution

Date	Particular	Debit $	Credit $
12/16/20X7	Equipment	95,200
	Accounts payable		95,200
	(Purchase of equipment payable in Swiss franc)

	Foreign currency receivable from broker	93,800
	Dollars payable to exchange broker		93,800
	(Signed a forward exchange contract for 60 days)

12/31/X7	Foreign currency transaction loss	2,800
	Accounts payable		2,800
	(Exchange transaction loss recognized on revaluation of payable)

	Foreign currency receivable form broker	3,500
	Other comprehensive income		3,500
	(Foreign currency gain on revaluation recognized on December 31)

	Other comprehensive income	2,800
	Foreign currency transaction gain		2,800
	(Offset of foreign currency transaction loss on revaluation)

02/14/20X8	Other comprehensive income	700
	Foreign currency receivable from broker		700
	(Loss on revaluation of February recognized)

	Accounts payable	1,400
	Foreign currency transaction gain		1,400
	(Revaluation of foreign currency accounts payable)

	Foreign currency transaction loss	1,400
	Other comprehensive income		1,400
	(Offset of foreign currency transaction gain)

	Dollars payable to exchange broker	93,800
	Cash		93,800
	(Paid U.S dollars to exchange broker for forward contract)

	Foreign currency units	96,600
	Foreign currency receivable from Exchange broker		96,600
	(Received francs from exchange broke recognized in U.S. dollar)

	Accounts payable	96,600
	Foreign currency units		96,600
	(Settlement of foreign currency payable)

Exchange of equipment value at purchase

$95,200 = SFr 140,000 × $.68

Foreign currency receivable from broker

$93,800 = SFr 140,000 × $.67

Revaluation of accounts payable to current U.S. dollars:

SFr 140,000 × $.70 Dec. 31 spot	$98,000
SFr 140,000 × $.68 Dec. 16 spot	($95,200)
	$2,800

Revaluation of foreign currency receivable:

SFr 140,000 × $.695 Dec. 31 spot	$97,300
SFr 140,000 × $.67 Dec. 16 spot	($93,800)
	$3,500

Revaluation of foreign currency receivable to current equivalent U.S. dollar:

SFr 140,000 × $.69 Feb. 14 spot	$96,600
SFr 140,000 × $.695 Dec. 31 spot	($97,300)
	$700

Revaluation of foreign currency accounts payable to current U.S. dollars:

SFr 140,000 × $.69 Feb. 14 spot	$96,600
SFr 140,000 × $.70 Dec. 31 spot	($98,000)
	$1,400

Receipt of Francs from exchange broker

$96,600 = SFr 140,000 × $.69 spot

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Answer 4

Question

Chapter 11, Problem 11.10E

Part I

To determine

Introduction:

Forward Exchange Contract: A forward exchange contract shows exchange rates for selected major international currencies for one month, three months, and six months forward contracts. An active dealer market is available for companies willing to transact in foreign currencies. The forward rate on a date is not the same as the spot rate. The difference between spot and the forward rate is known as the spread. The spread gives information about the strength or weakness of currencies.

The entries to record the purchase of equipment, assuming forward contract is not designed as a hedge, but is entered into manage the company’s foreign currency exposure and also determine effect of these transactions on financial statements.

Part I

Expert Solution

Answer to Problem 11.10E

Net effect on income $700

Explanation of Solution

a. entries

Date	Particular	Debit $	Credit $
12/16/20X7	Equipment	95,200
	Accounts payable		95,200
	(Purchase of equipment payable in Swiss franc)

	Foreign currency receivable from broker	93,800
	Dollars payable to exchange broker		93,800
	(Signed a forward exchange contract for 60 days)

12/31/X7	Foreign currency transaction loss	2,800
	Accounts payable		2,800
	(Exchange transaction loss recognized on revaluation of payable)

	Foreign currency receivable form broker	3,500
	Foreign currency transaction gain		3,500
	(Foreign currency gain on revaluation recognized on December 31)

02/14/20X8	Foreign currency transaction loss	700
	Foreign currency receivable from broker		700
	(Loss on revaluation of February recognized)

	Accounts payable	1,400
	Foreign currency transaction gain		1,400
	(Revaluation of foreign currency accounts payable)

	Dollars payable to exchange broker	93,800
	Cash		93,800
	(Paid U.S dollars to exchange broker for forward contract)

	Foreign currency units	96,600
	Foreign currency receivable from exchange broker		96,600
	(Received francs from exchange broke recognized in U.S. dollar)

	Accounts payable	96,600
	Foreign currency units		96,600
	(Settlement of foreign currency payable)

Exchange of equipment value at purchase

$95,200 = SFr 140,000 × $.68

Foreign currency receivable from broker

$93,800 = SFr 140,000 × $.67

Revaluation of accounts payable to current U.S. dollars:

SFr 140,000 × $.70 Dec. 31 spot	$98,000
SFr 140,000 × $.68 Dec. 16 spot	($95,200)
	$2,800

Revaluation of foreign currency receivable:

SFr 140,000 × $.695 Dec. 31 spot	$97,300
SFr 140,000 × $.67 Dec. 16 spot	($93,800)
	$3,500

Revaluation of foreign currency receivable to current equivalent U.S. dollar:

SFr 140,000 × $.69 Feb. 14 spot	$96,600
SFr 140,000 × $.695 Dec. 31 spot	($97,300)
	$700

Revaluation of foreign currency accounts payable to current U.S. dollars:

SFr 140,000 × $.69 Feb. 14 spot	$96,600
SFr 140,000 × $.70 Dec. 31 spot	($98,000)
	$1,400

Receipt of Francs from exchange broker

$96,600 = SFr 140,000 × $.69 spot

b. Effect on income statement

	$
Foreign currency exchange loss (with Swiss co)	(2,800)
Foreign currency exchange gain ( with broker)	3,500
Net effect on income	700

c. Overall effect of transaction

	$
Foreign exchange gain 20X7	700
Foreign exchange loss on receivable 20X8	(700)
Foreign exchange transaction gain on payable 20X8	1,400
Overall effect	1,400

Part II

To determine

Introduction:

Forward Exchange Contract: A forward exchange contract shows exchange rates for selected major international currencies for one month, three months, and six months forward contracts. An active dealer market is available for companies willing to transact in foreign currencies. The forward rate on a date is not the same as the spot rate. The difference between spot and the forward rate is known as the spread. The spread gives information about the strength or weakness of currencies.

The entries assuming the forward contract is designed as a cash flow hedge for variability of future cash flows from the foreign currency accounts payable.

Part II

Expert Solution

Explanation of Solution

Date	Particular	Debit $	Credit $
12/16/20X7	Equipment	95,200
	Accounts payable		95,200
	(Purchase of equipment payable in Swiss franc)

	Foreign currency receivable from broker	93,800
	Dollars payable to exchange broker		93,800
	(Signed a forward exchange contract for 60 days)

12/31/X7	Foreign currency transaction loss	2,800
	Accounts payable		2,800
	(Exchange transaction loss recognized on revaluation of payable)

	Foreign currency receivable form broker	3,500
	Other comprehensive income		3,500
	(Foreign currency gain on revaluation recognized on December 31)

	Other comprehensive income	2,800
	Foreign currency transaction gain		2,800
	(Offset of foreign currency transaction loss on revaluation)

02/14/20X8	Other comprehensive income	700
	Foreign currency receivable from broker		700
	(Loss on revaluation of February recognized)

	Accounts payable	1,400
	Foreign currency transaction gain		1,400
	(Revaluation of foreign currency accounts payable)

	Foreign currency transaction loss	1,400
	Other comprehensive income		1,400
	(Offset of foreign currency transaction gain)

	Dollars payable to exchange broker	93,800
	Cash		93,800
	(Paid U.S dollars to exchange broker for forward contract)

	Foreign currency units	96,600
	Foreign currency receivable from Exchange broker		96,600
	(Received francs from exchange broke recognized in U.S. dollar)

	Accounts payable	96,600
	Foreign currency units		96,600
	(Settlement of foreign currency payable)

Exchange of equipment value at purchase

$95,200 = SFr 140,000 × $.68

Foreign currency receivable from broker

$93,800 = SFr 140,000 × $.67

Revaluation of accounts payable to current U.S. dollars:

SFr 140,000 × $.70 Dec. 31 spot	$98,000
SFr 140,000 × $.68 Dec. 16 spot	($95,200)
	$2,800

Revaluation of foreign currency receivable:

SFr 140,000 × $.695 Dec. 31 spot	$97,300
SFr 140,000 × $.67 Dec. 16 spot	($93,800)
	$3,500

Revaluation of foreign currency receivable to current equivalent U.S. dollar:

SFr 140,000 × $.69 Feb. 14 spot	$96,600
SFr 140,000 × $.695 Dec. 31 spot	($97,300)
	$700

Revaluation of foreign currency accounts payable to current U.S. dollars:

SFr 140,000 × $.69 Feb. 14 spot	$96,600
SFr 140,000 × $.70 Dec. 31 spot	($98,000)
	$1,400

Receipt of Francs from exchange broker

$96,600 = SFr 140,000 × $.69 spot

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Answer 5

Chapter 11, Problem 11.10E

Part I

To determine

Introduction:

Forward Exchange Contract: A forward exchange contract shows exchange rates for selected major international currencies for one month, three months, and six months forward contracts. An active dealer market is available for companies willing to transact in foreign currencies. The forward rate on a date is not the same as the spot rate. The difference between spot and the forward rate is known as the spread. The spread gives information about the strength or weakness of currencies.

The entries to record the purchase of equipment, assuming forward contract is not designed as a hedge, but is entered into manage the company’s foreign currency exposure and also determine effect of these transactions on financial statements.

Part I

Expert Solution

Answer to Problem 11.10E

Net effect on income $700

Explanation of Solution

a. entries

Date	Particular	Debit $	Credit $
12/16/20X7	Equipment	95,200
	Accounts payable		95,200
	(Purchase of equipment payable in Swiss franc)

	Foreign currency receivable from broker	93,800
	Dollars payable to exchange broker		93,800
	(Signed a forward exchange contract for 60 days)

12/31/X7	Foreign currency transaction loss	2,800
	Accounts payable		2,800
	(Exchange transaction loss recognized on revaluation of payable)

	Foreign currency receivable form broker	3,500
	Foreign currency transaction gain		3,500
	(Foreign currency gain on revaluation recognized on December 31)

02/14/20X8	Foreign currency transaction loss	700
	Foreign currency receivable from broker		700
	(Loss on revaluation of February recognized)

	Accounts payable	1,400
	Foreign currency transaction gain		1,400
	(Revaluation of foreign currency accounts payable)

	Dollars payable to exchange broker	93,800
	Cash		93,800
	(Paid U.S dollars to exchange broker for forward contract)

	Foreign currency units	96,600
	Foreign currency receivable from exchange broker		96,600
	(Received francs from exchange broke recognized in U.S. dollar)

	Accounts payable	96,600
	Foreign currency units		96,600
	(Settlement of foreign currency payable)

Exchange of equipment value at purchase

$95,200 = SFr 140,000 × $.68

Foreign currency receivable from broker

$93,800 = SFr 140,000 × $.67

Revaluation of accounts payable to current U.S. dollars:

SFr 140,000 × $.70 Dec. 31 spot	$98,000
SFr 140,000 × $.68 Dec. 16 spot	($95,200)
	$2,800

Revaluation of foreign currency receivable:

SFr 140,000 × $.695 Dec. 31 spot	$97,300
SFr 140,000 × $.67 Dec. 16 spot	($93,800)
	$3,500

Revaluation of foreign currency receivable to current equivalent U.S. dollar:

SFr 140,000 × $.69 Feb. 14 spot	$96,600
SFr 140,000 × $.695 Dec. 31 spot	($97,300)
	$700

Revaluation of foreign currency accounts payable to current U.S. dollars:

SFr 140,000 × $.69 Feb. 14 spot	$96,600
SFr 140,000 × $.70 Dec. 31 spot	($98,000)
	$1,400

Receipt of Francs from exchange broker

$96,600 = SFr 140,000 × $.69 spot

b. Effect on income statement

	$
Foreign currency exchange loss (with Swiss co)	(2,800)
Foreign currency exchange gain ( with broker)	3,500
Net effect on income	700

c. Overall effect of transaction

	$
Foreign exchange gain 20X7	700
Foreign exchange loss on receivable 20X8	(700)
Foreign exchange transaction gain on payable 20X8	1,400
Overall effect	1,400

Part II

To determine

Introduction:

Forward Exchange Contract: A forward exchange contract shows exchange rates for selected major international currencies for one month, three months, and six months forward contracts. An active dealer market is available for companies willing to transact in foreign currencies. The forward rate on a date is not the same as the spot rate. The difference between spot and the forward rate is known as the spread. The spread gives information about the strength or weakness of currencies.

The entries assuming the forward contract is designed as a cash flow hedge for variability of future cash flows from the foreign currency accounts payable.

Part II

Expert Solution

Explanation of Solution

Date	Particular	Debit $	Credit $
12/16/20X7	Equipment	95,200
	Accounts payable		95,200
	(Purchase of equipment payable in Swiss franc)

	Foreign currency receivable from broker	93,800
	Dollars payable to exchange broker		93,800
	(Signed a forward exchange contract for 60 days)

12/31/X7	Foreign currency transaction loss	2,800
	Accounts payable		2,800
	(Exchange transaction loss recognized on revaluation of payable)

	Foreign currency receivable form broker	3,500
	Other comprehensive income		3,500
	(Foreign currency gain on revaluation recognized on December 31)

	Other comprehensive income	2,800
	Foreign currency transaction gain		2,800
	(Offset of foreign currency transaction loss on revaluation)

02/14/20X8	Other comprehensive income	700
	Foreign currency receivable from broker		700
	(Loss on revaluation of February recognized)

	Accounts payable	1,400
	Foreign currency transaction gain		1,400
	(Revaluation of foreign currency accounts payable)

	Foreign currency transaction loss	1,400
	Other comprehensive income		1,400
	(Offset of foreign currency transaction gain)

	Dollars payable to exchange broker	93,800
	Cash		93,800
	(Paid U.S dollars to exchange broker for forward contract)

	Foreign currency units	96,600
	Foreign currency receivable from Exchange broker		96,600
	(Received francs from exchange broke recognized in U.S. dollar)

	Accounts payable	96,600
	Foreign currency units		96,600
	(Settlement of foreign currency payable)

Exchange of equipment value at purchase

$95,200 = SFr 140,000 × $.68

Foreign currency receivable from broker

$93,800 = SFr 140,000 × $.67

Revaluation of accounts payable to current U.S. dollars:

SFr 140,000 × $.70 Dec. 31 spot	$98,000
SFr 140,000 × $.68 Dec. 16 spot	($95,200)
	$2,800

Revaluation of foreign currency receivable:

SFr 140,000 × $.695 Dec. 31 spot	$97,300
SFr 140,000 × $.67 Dec. 16 spot	($93,800)
	$3,500

Revaluation of foreign currency receivable to current equivalent U.S. dollar:

SFr 140,000 × $.69 Feb. 14 spot	$96,600
SFr 140,000 × $.695 Dec. 31 spot	($97,300)
	$700

Revaluation of foreign currency accounts payable to current U.S. dollars:

SFr 140,000 × $.69 Feb. 14 spot	$96,600
SFr 140,000 × $.70 Dec. 31 spot	($98,000)
	$1,400

Receipt of Francs from exchange broker

$96,600 = SFr 140,000 × $.69 spot

Answer 6

Chapter 11, Problem 11.10E

Part I

To determine

Introduction:

Forward Exchange Contract: A forward exchange contract shows exchange rates for selected major international currencies for one month, three months, and six months forward contracts. An active dealer market is available for companies willing to transact in foreign currencies. The forward rate on a date is not the same as the spot rate. The difference between spot and the forward rate is known as the spread. The spread gives information about the strength or weakness of currencies.

The entries to record the purchase of equipment, assuming forward contract is not designed as a hedge, but is entered into manage the company’s foreign currency exposure and also determine effect of these transactions on financial statements.

Part I

Expert Solution

Answer to Problem 11.10E

Net effect on income $700

Explanation of Solution

a. entries

Date	Particular	Debit $	Credit $
12/16/20X7	Equipment	95,200
	Accounts payable		95,200
	(Purchase of equipment payable in Swiss franc)

	Foreign currency receivable from broker	93,800
	Dollars payable to exchange broker		93,800
	(Signed a forward exchange contract for 60 days)

12/31/X7	Foreign currency transaction loss	2,800
	Accounts payable		2,800
	(Exchange transaction loss recognized on revaluation of payable)

	Foreign currency receivable form broker	3,500
	Foreign currency transaction gain		3,500
	(Foreign currency gain on revaluation recognized on December 31)

02/14/20X8	Foreign currency transaction loss	700
	Foreign currency receivable from broker		700
	(Loss on revaluation of February recognized)

	Accounts payable	1,400
	Foreign currency transaction gain		1,400
	(Revaluation of foreign currency accounts payable)

	Dollars payable to exchange broker	93,800
	Cash		93,800
	(Paid U.S dollars to exchange broker for forward contract)

	Foreign currency units	96,600
	Foreign currency receivable from exchange broker		96,600
	(Received francs from exchange broke recognized in U.S. dollar)

	Accounts payable	96,600
	Foreign currency units		96,600
	(Settlement of foreign currency payable)

Exchange of equipment value at purchase

$95,200 = SFr 140,000 × $.68

Foreign currency receivable from broker

$93,800 = SFr 140,000 × $.67

Revaluation of accounts payable to current U.S. dollars:

SFr 140,000 × $.70 Dec. 31 spot	$98,000
SFr 140,000 × $.68 Dec. 16 spot	($95,200)
	$2,800

Revaluation of foreign currency receivable:

SFr 140,000 × $.695 Dec. 31 spot	$97,300
SFr 140,000 × $.67 Dec. 16 spot	($93,800)
	$3,500

Revaluation of foreign currency receivable to current equivalent U.S. dollar:

SFr 140,000 × $.69 Feb. 14 spot	$96,600
SFr 140,000 × $.695 Dec. 31 spot	($97,300)
	$700

Revaluation of foreign currency accounts payable to current U.S. dollars:

SFr 140,000 × $.69 Feb. 14 spot	$96,600
SFr 140,000 × $.70 Dec. 31 spot	($98,000)
	$1,400

Receipt of Francs from exchange broker

$96,600 = SFr 140,000 × $.69 spot

b. Effect on income statement

	$
Foreign currency exchange loss (with Swiss co)	(2,800)
Foreign currency exchange gain ( with broker)	3,500
Net effect on income	700

c. Overall effect of transaction

	$
Foreign exchange gain 20X7	700
Foreign exchange loss on receivable 20X8	(700)
Foreign exchange transaction gain on payable 20X8	1,400
Overall effect	1,400

Answer 7

Chapter 11, Problem 11.10E

Part I

To determine

Introduction:

Forward Exchange Contract: A forward exchange contract shows exchange rates for selected major international currencies for one month, three months, and six months forward contracts. An active dealer market is available for companies willing to transact in foreign currencies. The forward rate on a date is not the same as the spot rate. The difference between spot and the forward rate is known as the spread. The spread gives information about the strength or weakness of currencies.

The entries to record the purchase of equipment, assuming forward contract is not designed as a hedge, but is entered into manage the company’s foreign currency exposure and also determine effect of these transactions on financial statements.

Answer 8

Part I

Expert Solution

Answer to Problem 11.10E

Net effect on income $700

Answer 9

Part I

Expert Solution

Answer 10

Part I

Expert Solution

Answer 11

Expert Solution

Answer 12

Explanation of Solution

a. entries

Date	Particular	Debit $	Credit $
12/16/20X7	Equipment	95,200
	Accounts payable		95,200
	(Purchase of equipment payable in Swiss franc)

	Foreign currency receivable from broker	93,800
	Dollars payable to exchange broker		93,800
	(Signed a forward exchange contract for 60 days)

12/31/X7	Foreign currency transaction loss	2,800
	Accounts payable		2,800
	(Exchange transaction loss recognized on revaluation of payable)

	Foreign currency receivable form broker	3,500
	Foreign currency transaction gain		3,500
	(Foreign currency gain on revaluation recognized on December 31)

02/14/20X8	Foreign currency transaction loss	700
	Foreign currency receivable from broker		700
	(Loss on revaluation of February recognized)

	Accounts payable	1,400
	Foreign currency transaction gain		1,400
	(Revaluation of foreign currency accounts payable)

	Dollars payable to exchange broker	93,800
	Cash		93,800
	(Paid U.S dollars to exchange broker for forward contract)

	Foreign currency units	96,600
	Foreign currency receivable from exchange broker		96,600
	(Received francs from exchange broke recognized in U.S. dollar)

	Accounts payable	96,600
	Foreign currency units		96,600
	(Settlement of foreign currency payable)

Exchange of equipment value at purchase

$95,200 = SFr 140,000 × $.68

Foreign currency receivable from broker

$93,800 = SFr 140,000 × $.67

Revaluation of accounts payable to current U.S. dollars:

SFr 140,000 × $.70 Dec. 31 spot	$98,000
SFr 140,000 × $.68 Dec. 16 spot	($95,200)
	$2,800

Revaluation of foreign currency receivable:

SFr 140,000 × $.695 Dec. 31 spot	$97,300
SFr 140,000 × $.67 Dec. 16 spot	($93,800)
	$3,500

Revaluation of foreign currency receivable to current equivalent U.S. dollar:

SFr 140,000 × $.69 Feb. 14 spot	$96,600
SFr 140,000 × $.695 Dec. 31 spot	($97,300)
	$700

Revaluation of foreign currency accounts payable to current U.S. dollars:

SFr 140,000 × $.69 Feb. 14 spot	$96,600
SFr 140,000 × $.70 Dec. 31 spot	($98,000)
	$1,400

Receipt of Francs from exchange broker

$96,600 = SFr 140,000 × $.69 spot

b. Effect on income statement

	$
Foreign currency exchange loss (with Swiss co)	(2,800)
Foreign currency exchange gain ( with broker)	3,500
Net effect on income	700

c. Overall effect of transaction

	$
Foreign exchange gain 20X7	700
Foreign exchange loss on receivable 20X8	(700)
Foreign exchange transaction gain on payable 20X8	1,400
Overall effect	1,400

Answer 13

Part II

To determine

Introduction:

Forward Exchange Contract: A forward exchange contract shows exchange rates for selected major international currencies for one month, three months, and six months forward contracts. An active dealer market is available for companies willing to transact in foreign currencies. The forward rate on a date is not the same as the spot rate. The difference between spot and the forward rate is known as the spread. The spread gives information about the strength or weakness of currencies.

The entries assuming the forward contract is designed as a cash flow hedge for variability of future cash flows from the foreign currency accounts payable.

Part II

Expert Solution

Explanation of Solution

Date	Particular	Debit $	Credit $
12/16/20X7	Equipment	95,200
	Accounts payable		95,200
	(Purchase of equipment payable in Swiss franc)

	Foreign currency receivable from broker	93,800
	Dollars payable to exchange broker		93,800
	(Signed a forward exchange contract for 60 days)

12/31/X7	Foreign currency transaction loss	2,800
	Accounts payable		2,800
	(Exchange transaction loss recognized on revaluation of payable)

	Foreign currency receivable form broker	3,500
	Other comprehensive income		3,500
	(Foreign currency gain on revaluation recognized on December 31)

	Other comprehensive income	2,800
	Foreign currency transaction gain		2,800
	(Offset of foreign currency transaction loss on revaluation)

02/14/20X8	Other comprehensive income	700
	Foreign currency receivable from broker		700
	(Loss on revaluation of February recognized)

	Accounts payable	1,400
	Foreign currency transaction gain		1,400
	(Revaluation of foreign currency accounts payable)

	Foreign currency transaction loss	1,400
	Other comprehensive income		1,400
	(Offset of foreign currency transaction gain)

	Dollars payable to exchange broker	93,800
	Cash		93,800
	(Paid U.S dollars to exchange broker for forward contract)

	Foreign currency units	96,600
	Foreign currency receivable from Exchange broker		96,600
	(Received francs from exchange broke recognized in U.S. dollar)

	Accounts payable	96,600
	Foreign currency units		96,600
	(Settlement of foreign currency payable)

Exchange of equipment value at purchase

$95,200 = SFr 140,000 × $.68

Foreign currency receivable from broker

$93,800 = SFr 140,000 × $.67

Revaluation of accounts payable to current U.S. dollars:

SFr 140,000 × $.70 Dec. 31 spot	$98,000
SFr 140,000 × $.68 Dec. 16 spot	($95,200)
	$2,800

Revaluation of foreign currency receivable:

SFr 140,000 × $.695 Dec. 31 spot	$97,300
SFr 140,000 × $.67 Dec. 16 spot	($93,800)
	$3,500

Revaluation of foreign currency receivable to current equivalent U.S. dollar:

SFr 140,000 × $.69 Feb. 14 spot	$96,600
SFr 140,000 × $.695 Dec. 31 spot	($97,300)
	$700

Revaluation of foreign currency accounts payable to current U.S. dollars:

SFr 140,000 × $.69 Feb. 14 spot	$96,600
SFr 140,000 × $.70 Dec. 31 spot	($98,000)
	$1,400

Receipt of Francs from exchange broker

$96,600 = SFr 140,000 × $.69 spot

Answer 14

Part II

To determine

Introduction:

Forward Exchange Contract: A forward exchange contract shows exchange rates for selected major international currencies for one month, three months, and six months forward contracts. An active dealer market is available for companies willing to transact in foreign currencies. The forward rate on a date is not the same as the spot rate. The difference between spot and the forward rate is known as the spread. The spread gives information about the strength or weakness of currencies.

The entries assuming the forward contract is designed as a cash flow hedge for variability of future cash flows from the foreign currency accounts payable.

Answer 15

Part II

Expert Solution

Explanation of Solution

Date	Particular	Debit $	Credit $
12/16/20X7	Equipment	95,200
	Accounts payable		95,200
	(Purchase of equipment payable in Swiss franc)

	Foreign currency receivable from broker	93,800
	Dollars payable to exchange broker		93,800
	(Signed a forward exchange contract for 60 days)

12/31/X7	Foreign currency transaction loss	2,800
	Accounts payable		2,800
	(Exchange transaction loss recognized on revaluation of payable)

	Foreign currency receivable form broker	3,500
	Other comprehensive income		3,500
	(Foreign currency gain on revaluation recognized on December 31)

	Other comprehensive income	2,800
	Foreign currency transaction gain		2,800
	(Offset of foreign currency transaction loss on revaluation)

02/14/20X8	Other comprehensive income	700
	Foreign currency receivable from broker		700
	(Loss on revaluation of February recognized)

	Accounts payable	1,400
	Foreign currency transaction gain		1,400
	(Revaluation of foreign currency accounts payable)

	Foreign currency transaction loss	1,400
	Other comprehensive income		1,400
	(Offset of foreign currency transaction gain)

	Dollars payable to exchange broker	93,800
	Cash		93,800
	(Paid U.S dollars to exchange broker for forward contract)

	Foreign currency units	96,600
	Foreign currency receivable from Exchange broker		96,600
	(Received francs from exchange broke recognized in U.S. dollar)

	Accounts payable	96,600
	Foreign currency units		96,600
	(Settlement of foreign currency payable)

Exchange of equipment value at purchase

$95,200 = SFr 140,000 × $.68

Foreign currency receivable from broker

$93,800 = SFr 140,000 × $.67

Revaluation of accounts payable to current U.S. dollars:

SFr 140,000 × $.70 Dec. 31 spot	$98,000
SFr 140,000 × $.68 Dec. 16 spot	($95,200)
	$2,800

Revaluation of foreign currency receivable:

SFr 140,000 × $.695 Dec. 31 spot	$97,300
SFr 140,000 × $.67 Dec. 16 spot	($93,800)
	$3,500

Revaluation of foreign currency receivable to current equivalent U.S. dollar:

SFr 140,000 × $.69 Feb. 14 spot	$96,600
SFr 140,000 × $.695 Dec. 31 spot	($97,300)
	$700

Revaluation of foreign currency accounts payable to current U.S. dollars:

SFr 140,000 × $.69 Feb. 14 spot	$96,600
SFr 140,000 × $.70 Dec. 31 spot	($98,000)
	$1,400

Receipt of Francs from exchange broker

$96,600 = SFr 140,000 × $.69 spot

Answer 16

Part II

Expert Solution

Answer 17

Part II

Expert Solution

Answer 18

Expert Solution

Answer 19

Ch. 11 - Prob. 11.1Q Ch. 11 - Prob. 11.2Q Ch. 11 - The U.S. dollar strengthened against the European...Ch. 11 - Prob. 11.4Q Ch. 11 - Prob. 11.5Q Ch. 11 - How are assets and liabilities denominated in a...Ch. 11 - Prob. 11.7Q Ch. 11 - Prob. 11.8Q Ch. 11 - Prob. 11.9Q Ch. 11 - Distinguish between an exposed net asset position...

Answer to Problem 11.10E

Explanation of Solution

Explanation of Solution

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Chapter 11 Solutions