Problemnbsp 6-1nbsp lonbsp 5nbsp fcnbsp transactionsnbsp

Assignment Help Accounting Basics
Reference no: EM13375465

Problem  6-1  (LO  5)  FC  transactions,  commitments,  forcasted  transactions earnings impact. Jarvis Corporation transacts business with a number of foreign vendors and customers. These transactions are denominated in FC, and the company uses a number of hedging strategies to reduce the exposure to exchange rate risk. Several such transactions are as follows:

Transaction A: On November 30, the company purchased inventory from a vendor in the amount of 100,000 FC with payment due in 60 days. Also on November 30, the company purchased a forward contract to buy FC in 60 days. Changes in the value of the commitment are based on changes in forward rates.

Transaction B: On November 1, the company committed to provide services to a foreign customer in the amount of 100,000 FC. The services will be provided in 30 days. On November 1, the company also purchased a forward contract to sell 100,000 FC in 30 days.

Transaction C: On November 1, the company forecasted a purchase of equipment in 30 days.The forecasted cost is 100,000 FC, and the equipment is to be depreciated over ?ve years using the straight-line method of depreciation. On November 1, the company acquired a forward contract to buy 100,000 FC in 30 days.

Transaction D: On November 30, the company purchased an option to sell 100,000 FC in 60 days to hedge a forecasted sale to a customer in 60 days. The option sold for a premium of $1,200 and had a strike price of $1.155. The value of the option on December 31 was $2,000.

The time value of all hedging instruments is excluded from the assessment of hedge effectiveness. Relevant spot and forward rates are as follows:

Spot Rate            Forward Rate for 30

Daysfrom November 1    Forward Rate for 60

Daysfrom November 30

November 1 .. . . . . ... .. .. ..  1 FC ¼ $1.12               1FC ¼ $1.132

November 15 . . . . . ... .. .. ..  1 FC ¼ $1.13

November 30 . . . . . ... .. .. ..  1 FC ¼ $1.15              1 FC ¼$1.146

December 31.. . . . . ... .. .. ..  1 FC ¼ $1.14              1 FC ¼$1.138

Assuming that the company's year-end is December 31, for each of the above transactions

determine the current-year effect on earnings. All necessary discounting should be determined

by using a 6% discount rate. For transactions C and D, the time value of the hedging instru-

ment is excluded from hedge effectiveness and is to be separately accounted for.

 

Problem 6-3 (LO 3, 5) Income statement effects of transactions, commitments, and hedging. 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 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.

Various spot and forward rates for the euro are as follows:

Spot Rate            Forward Rate for60

Days from March 1 Forward Ratefor 90

Daysfrom March15

March1.... .. . . . . ... .. .. .... .. . .. .              $1.180  $1.181

March15 .. .. . . . . ... .. .. .... .. . .. . 1.181  1.180    $1.179

March31 .. .. . . . . ... .. .. .... .. . .. . 1.179  1.178    1.177

April30.... .. . . . . ... .. .. .... .. . .. . 1.175    1.174

 

 

Problem 6-3 Template          
                 
The Foreign Currency Transaction        
                 
Part 1           March   April
Sales           36000    
Cost of Goods Sold       160000    
Gross Profit              
                 
Exchange Gain (Loss)          
                 
                 
                 
Net Income Effect            
                 
                 
Part 2                
                 
The Hedge on the Foreign           
Currency Transaction          
                 
Gain(Loss) on Forward Contract        
Net Income Effect            
                 
                 
                 
Part 3                
                 
The Foreign Currency Commitment        
                 
Gain or loss on Firm Commitment        
Net Income Effect            
                 
                 
Part 4                
                 
                 
The Hedge on the Foreign           
Currency Commitment          
                 
            01-Mar 31-Mar 30-Apr
Number of FC              
Forward Rate Remaining Time-1FC        
                 
                 
Fair Value of Original Contract        
                 
Original Forward Rate          
Current Forward Rate          
Gain or (Loss) in Forward Rate        
                 
                 
Present Value of Change           
                 
N=1 i= .5%              
N=0 i=.5%              
                 
                 
Change in Value From          
Prior Period              
                 
Current Present Value          
Prior Present Value            
                 
Change in Present Value          
                 
                 
                 
Schedule B for Part 3 and 4          
                 
            15-Mar 31-Mar 30-Apr
Number of FC              
Forward Rate Remaining Time-1 FC        
                 
                 
Fair Value of Original Contract        
Original Forward Rate          
Current Forward Rate          
Gain or Loss in Forward Rate        
                 
                 
Present Value Change          
                 
  n=2.5 i=.5%            
  n=1.5 i=.5%            
                 
                 
                 
Current Change from Prior Period        
                 
  Current Present Value        
  Prior Present Value          
                 
  Change in Present Value        

 

 

Reference no: EM13375465

Questions Cloud

1nbspnbspnbspnbspnbsp suppose a monopolist manufacturer : 1.nbspnbspnbspnbspnbsp suppose a monopolist manufacturer sells his products through a monopolist retailer.nbsp the
Questionnbspat 1 july 2014 pavo ltd acquired 60 of the : questionnbspat 1 july 2014 pavo ltd acquired 60 of the shares of octans ltd for 153 000 on a cum div. basis. pavo ltd
Microeconomics questionsq1 jonathans preferences are : microeconomics questions.q1. jonathans preferences are characterized by diminishing marginal rate of substitution. at
The unadjusted trial balance for the general fund of the : the unadjusted trial balance for the general fund of the city of jordan at june 30 2015 is as followsdebitsaccounts
Problemnbsp 6-1nbsp lonbsp 5nbsp fcnbsp transactionsnbsp : problemnbsp 6-1nbsp lonbsp 5nbsp fcnbsp transactionsnbsp commitmentsnbsp forcastednbsp transactions earnings impact.
Java graphics-write an application that extends jframe and : java graphics-write an application that extends jframe and that displays a phrase in every font size from 6 through
Each group must have students who represent both sides of : each group must have students who represent both sides of the legal issue in each case and must prepare a legal
Card shop inc csi is a small owner-managed greeting card : card shop inc. csi is a small owner-managed greeting card specialty store. due to the small size of the store the
Suppose the government is considering the imposition of a : suppose the government is considering the imposition of a unit tax to be levied on beer producers. the view of

Reviews

Write a Review

Accounting Basics Questions & Answers

  How much control does fed have over this longer real rate

Hubbard argues that the Fed can control the Fed funds rate, but the interest rate that is important for the economy is a longer-term real rate of interest.   How much control does the Fed have over this longer real rate?

  Coures:- fundamental accounting principles

Coures:- Fundamental Accounting Principles: - Explain the goals and uses of special journals.

  Accounting problems

Accounting problems,  Draw a detailed timeline incorporating the dividends, calculate    the exact Payback Period  b)   the discounted Payback Period. the IRR,  the NPV, the Profitability Index.

  Write a report on internal controls

Write a report on Internal Controls

  Prepare the bank reconciliation for company

Prepare the bank reconciliation for company.

  Cost-benefit analysis

Create a cost-benefit analysis to evaluate the project

  Theory of interest

Theory of Interest: NPV, IRR, Nominal and Real, Amortization, Sinking Fund, TWRR, DWRR

  Liquidity and profitability

Distinguish between liquidity and profitability.

  What is the expected risk premium on the portfolio

Your Corp, Inc. has a corporate tax rate of 35%. Please calculate their after tax cost of debt expressed as a percentage. Your Corp, Inc. has several outstanding bond issues all of which require semiannual interest payments.

  Simple interest and compound interest

Simple Interest, Compound interest, discount rate, force of interest, AV, PV

  Capm and venture capital

CAPM and Venture Capital

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd