Reference no: EM132572108

Globalization is a continuous process whereby managers become aware of the impact of international activities on their companies. This process takes place in stages that include exporting, licensing joint ventures, wholly owned subsidiaries, and global sourcing. Each stage has implications for the type of accounting information reported.

Question 1: Striking Furs imports furs from Canada. In the space provided below, prepare journal entries to record the following events.

Dec. 11, 2017: Purchased furs from Capable Trappers, Ltd., a Canadian corporation, at a price of 25,000 Canadian dollars, due in 60 days. The current exchange rate is $0.85 U.S. dollars per Canadian dollar. (Striking uses the perpetual inventory method; debit the Inventory account.)

Dec. 31, 2017: Striking made a year-end adjusting entry relating to the account payable to Capable Trappers. The exchange rate at year-end is $0.89 U.S. dollars per Canadian dollar.

Feb. 9, 2018: Issued a check for $21,750 (U.S. dollars) to National Bank in full settlement of the liability to Capable Trappers, Ltd. The exchange rate at this date is $0.87 U.S. dollars per Canadian dollar.

Question 2: Explain ways in which Striking Furs can protect itself against the losses that would arise from a sudden increase in the foreign exchange rate.

a. Forward contract : Company can enter into forward contract with bank so that one rate of exchange will be decided with the bank and on the due date bank will provide the foreign currency at the agreed rate.

b. Derivative Contract : Another option to protect from fluctuation is company can enter into derivative contract in market, so that the loss from increase in exchange rate will be offset with the income from derivative contract.