Reference no: EM132496511

M Company has the following export and import transactions during 20X5:

1. On March 1, M sold goods to a Canadian Company for C$30,000, receivable on May 31. The spot rates for the C$ were C$1 = $0.65 on March 1 and C$1 = $0.68 on May 31.
2. On July 1, M signed a contract to purchase equipment from a Japanese Company for ¥500,000. The equipment was manufactured in Japan during August and was delivered to M on August 31 with payment due on October 29. The spot rates for the yen were: ¥1 = $0.102 on July 1; ¥1 = $0.104 on August 31; and ¥1 = $0.106 on October 29. The 60-day forward exchange rate on August 31, 20X5 was ¥1 = $0.1055.
3. On November 16, M purchased inventory from a London-based company for £10,000, payable on January 15, 20X6. The spot rates for the pound were £1 = $1.65 on November 16; £1 = $1.63 on December 31; and £1 = $1.64 on January 15, 20X6. The forward rate on December 31, 20X5 for a January 15, 20X6 exchange was £1 = $1.645.

Required:

Question a. Prepare journal entries to record M's import and export transactions during 20X5 and 20X6.

Question b. What amount of foreign currency transaction gain or loss would M report on its income statement for 20X5?

Part II:

Assume that M used forward currency contracts to manage the foreign currency risks of all of its export and import transactions during 20X5.

1. On March 1, 20X5, M, anticipating a weaker C$ on the May 31, 20X5 settlement date, entered into a 90-day forward contract to sell C$30,000 at a forward exchange rate of C$1 = $0.64. The forward contract was not designed as a hedge.
2. On July 1, 20X5, M, anticipating a strengthening of the yen on the October 29, 20X5 settlement date entered into a 120-day forward contract to purchase ¥500,000 at a forward exchange rate of ¥1 = $0.105. The forward contract was designated as a fair value hedge of a firm commitment.
3. On November 16, 20X5, M, anticipating a strengthening of the pound on the January 15, 20X6 settlement date entered into a 60-day undesignated forward exchange contract to purchase £10,000 at a forward exchange rate of £1 = $1.67.

Required:

Question a. Prepare the journal entries required to record M's foreign currency activities during 20X5 and 20X6.

Question b. What amount of foreign currency transaction gain or loss would M report on its income statement for 20X5 if Parts I and II of this problem were combined?

Question c. What amount of foreign currency transaction gain or loss would M report on its income statement for 20X6 if Parts I and II of this problem were combined?