Exam 13: Accounting for Derivatives and Hedging Activities

Use the following information to answer the question(s)below. On December 1,2011,Thomas Company,a U.S.corporation,purchases inventory from a vendor in Italy for 400,000 euros.Payment is due in 90 days.To hedge the transaction,Thomas signs a forward contract to buy 400,000 euros in 90 days at $1.3670.Thomas uses a discount rate of 6% (present value factor for 30 days = .9950;60 days = .9901;90 days = .9851).Assume the forward contract will be settled net and this is a cash flow hedge.Currency exchange rates are shown below: -What is the fair value of the forward contract at December 31,2011?

On December 15,2011,Electronix Company purchased inventory from a foreign supplier for 2,000,000 foreign currency units (fcu's).Payment will be made on February 13,2012.On December 15,2011,to hedge the transaction,Electronix signed a forward contract to buy 2,000,000 fcu's in 60 days.Electronix uses a discount rate of 5% resulting in a 45-day present value factor of .9938.The forward contract will be settled net.The related exchange rates are shown below: On December 15,2011,Electronix recorded a debit to Inventory and a credit to Accounts Payable (fcu)for $20,000,using the current spot rate. Required: 1.Show the required entries on December 31,2011 if the hedge is a cash flow hedge.Round to the nearest whole dollar. 2.Show the required entries on December 31,2011 if the hedge is a fair value hedge.Round to the nearest whole dollar.

Use the following information to answer the question(s)below. On November 2,2011,Bellamy Corporation sells product to their Danish customer.At the same time,Bellamy signed a forward contract to sell 200,000 Danish krone in ninety days to hedge the account receivable at $0.1905,the 90-day forward rate.The receivable is expected to be collected in ninety days.Assume the forward contract will be settled net and this is a fair value hedge.The related exchange rates are shown below: -Assuming a present value factor of 1 for simplicity,what is the fair value of this forward contract on January 31?

On January 1,2011,Bambi borrowed $500,000 from Lonni.The five-year term note carries a variable rate interest,based on LIBOR,and interest is payable at December 31 of each year,compounded annually.The first year's rate of interest is 6% and Bambi would like to assure that their rate does not increase.Bambi enters into a pay-fixed,receive-variable interest rate swap agreement with Third National Bank,under which Bambi will pay 6%,fixed.At December 31,2011,it is determined that Bambi's interest rate to Lonni for the next year will be 5%.Treat as a cash flow hedge. Required: Determine the estimated fair value of the hedge at December 31,2011,and prepare the related journal entry required to document this hedge and the related interest payment at December 31,2011.Assume the interest rate curve is flat.

A fair value hedge differs from a cash flow hedge because a fair value hedge

Onoly Corporation (a U.S.manufacturer)sold parts to its customer in Hong Kong on December 8,2011 with payment of 500,000 Hong Kong Dollars (HKD)to be received in sixty days on February 6,2012.Onoly has a December 31 year end.The following exchange rates apply: Required: 1.Assuming no forward contract is taken,what is the amount of foreign currency exchange gain or loss that would be recorded in 2011,and in 2012? 2.Assuming a 60-day forward contract is taken on December 8 with the intent of hedging this foreign currency transaction,and that this hedge is properly accounted for as a cash flow hedge,what is the net effect on income to be recorded in 2011,and in 2012?

A highly-effective hedge of an existing asset or liability that is reported on the balance sheet would be recorded using

Wild West,Incorporated (a U.S.corporation)sold inventory to a company in the Philippines for 1,600,000 pesos on account on February 1,2011,with payment expected in 90 days.Wild West entered into a forward contract to hedge this transaction,and properly accounts for the transaction as a cash flow hedge.Wild West has a March 31 fiscal year end,and uses an 8% discount rate,resulting in a 30-day present value factor of .9934.The forward contract is settled net.The relevant exchange rates are shown below: Required: Record the journal entries needed by Wild West on February 1,March 31,and May 2.Round all entries to the nearest whole dollar.

Ivan has 14,000 barrels of oil that were purchased a month ago at $50.00 per barrel.On November 1,2011 Ivan hedges the value of the inventory by entering into a forward contract to sell 14,000 barrels of oil on January 31,2012 for $60.00 per barrel.The forward contract is to be settled net. Assume this is a fair value hedge. Required: Assume a 6% discount rate is reasonable,and using a mixed-attribute model,prepare the journal entries to account for this hedge at the following dates:

International accounting standards differ from U.S.Generally Accepted Accounting Principles in that International standards

On November 1,2010,Stateside Company (a U.S.manufacturer)sold an airplane for 1 million New Zealand dollars (NZ$)to New Zealand company Aukland Corporation.Stateside will receive payment on January 30,2011 in New Zealand dollars.In order to hedge the accounts receivable position,Stateside entered into a 90-day forward contract to sell 1 million New Zealand dollars on January 30,2011.On November 1,2010,the 90-day forward rate is US$0.73 per New Zealand dollar.The forward contract will be settled net.Account for the hedge as a fair value hedge.Ignore the time value of money. The relevant exchange rates per New Zealand dollar: Required: Record the journal entries that Stateside would need to prepare at November 1,2010,December 31,2010 and January 30,2011. December 31,2010 is the fiscal year end.

Ferb Company is a U.S.-based importer of fine fabrics.They periodically place orders with an Italian manufacturer for bolts of fabric at a price typically set in euros.Because they have business on an ongoing basis in euros,Ferb also enters into forward contracts to speculate on the Euro.On September 15,Ferb entered into a 45-day forward contract to purchase 2,000,000 euros.Ferb has a year-end of September 30.The forward contract cannot be settled net.Relevant exchange rates are shown below: Required: Prepare the journal entries to account for the forward contract for September and October.

Slickton Corporation,a U.S.holding company,enters into a forward contract on November 1,2011 to speculate in Singapore dollars (S$).The forward contract requires Slickton to sell 1,000,000 Singapore dollars to the exchange broker on January 30,2012.Net settlement is not permitted.Relevant exchange rates for the Singapore dollar are listed below: Required: Prepare the journal entries required by Slickton on November 1,2011,December 31,2011 (year end),and January 30,2012.

Use the following information to answer the question(s)below. On November 2,2011,Bellamy Corporation sells product to their Danish customer.At the same time,Bellamy signed a forward contract to sell 200,000 Danish krone in ninety days to hedge the account receivable at $0.1905,the 90-day forward rate.The receivable is expected to be collected in ninety days.Assume the forward contract will be settled net and this is a fair value hedge.The related exchange rates are shown below: -Assuming a present value factor of 1 for simplicity,what is the fair value of this forward contract on November 2?

On November 1,2010,Mayberry Corporation,a U.S.corporation,purchased from Cantata Corporation,a Mexican company,some machinery that cost 1,000,000 pesos.The invoice was payable in pesos on January 30,2011.To hedge against rapid changes in the peso,Mayberry entered into a forward contract on November 1,2010 with AB Trader & Company,a US brokerage and investment firm.The contract specified that Mayberry would buy 1,000,000 pesos from AB Trader at $0.084 per peso for settlement on January 30,2011. Assume that all three companies are subject to the same accounting standards and have December 31st year-ends.The spot rates for pesos on November 1,December 31,and January 30,are $0.082,$0.080,and $0.089,respectively.The 30-day forward rate for pesos on December 31,2010 is $0.083.The forward contract is not settled net. Required: Record General Journal entries for Mayberry Corporation on November 1,December 31,and January 30.If no entry is required on a particular date,indicate "No entry" in the General Journal.This is a fair value hedge.

When a cash flow hedge is appropriate,the effective portion of the gain or loss on the derivative is

Barnes Company entered into a forward contract during the current year to hedge the risk of a material supply cost increase.Based on the current market,at year-end the present value of the estimated amount they will have to pay in ten months is $750,000.What entry would be recorded at year-end closing,assuming that no amount was recorded for this contract until this time?

Cirtus Corporation,a U.S.corporation,placed an order for inventory from a Mexican supplier on September 18 when the spot rate was $0.0840 = 1 peso.The invoice price will be denominated in pesos.At that time,they entered into a 30-day forward contract (designated as a fair value hedge of the firm commitment to purchase)to purchase 860,000 pesos at a forward rate of $0.0810.On October 18 when the inventory was received,the spot rate was $0.0890.At what amount should the inventory be carried on Cirtus' books?

Taydus Corporation,a U.S.corporation,sold goods on December 2 to a company overseas,and is now carrying a receivable denominated in euros.Taydus signed a 60-day forward contract on that same date to sell euros.The spot rate was $1.40 on the date they signed the contract and the 60-day forward rate was $1.36.At the end of that month when they closed the books at their fiscal year-end,the spot rate was $1.42 and the 30-day forward rate was $1.40.Assume this is a fair value hedge.The forward contract will not be settled net.What would be reported by Taydus for the year ending December 31?

Astrotuff Company is planning to purchase 200,000 pounds of nylon from Tangsun Company.On November 1,2011,Astrotuff entered into a 90-day forward contract to hedge the planned purchase.The forward contract is to purchase 200,000 pounds of nylon at $1.80 per pound (forward rate at November 1,2011).On November 1,2011,the spot price of nylon is $1.75 per pound,but Astrotuff anticipates significant increases in the price of nylon.The forward contract is to be settled net. On December 31,2011,Astrotuff's year end,the forward rate to January 30,2012 is $1.78 per pound.The spot and forward rates on January 30,2012 are $1.85 per pound.Astrotuff uses a 6% discount rate relating to their hedging activity.Astrotuff purchases 200,000 pounds of nylon on January 30 when the forward contract expires. Required: Prepare the necessary journal entries to account for this cash flow hedge and related purchase of nylon.