Exam 13: Accounting for Derivatives and Hedging Activities

On January 1,2011,Bosna borrowed $100,000 from Lenda.The three-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 7% and Bosna would like to assure that their rate does not increase.Bosna enters into a pay-fixed,receive-variable interest rate swap agreement with Swamp City Bank,under which Bosna will pay 7%,fixed.At December 31,2011,it is determined that Bosna's interest rate to Lenda for 2012 will be 6%.At December 31,2012,the interest rate for 2013 was determined to be 8%.Treat as a cash flow hedge. Required: Determine the estimated fair value of the hedge at December 31,2011,and prepare the related journal entries required to document this hedge and the related interest payments at December 31,2011,2012,and 2013,including final repayment on 12/31/13.Assume a flat interest rate curve.

On November 1,2011,Moddel Company (a U.S.corporation)entered into a 90-day forward contract to purchase 200,000 British pounds.The purpose of the forward contract is to hedge a commitment to purchase special equipment on January 30,2012 from a British firm Jeckyl Inc.The invoice price on the purchase commitment is denominated in British pounds.The forward contract is not settled net.Assume Moddel uses a 12% interest rate.Use a fair value hedge. The relevant exchange rates are stated in dollars per pound: Required: 1.What journal entry did Moddel record on November 1,2011? 2.What journal entries did Moddel record on December 31,2011? 3.What journal entries did Moddel record on January 30,2012 if the purchase was made?

Opie Industries is a manufacturer of plastic bottles.On September 1,2011,Opie purchased an option contract at a cost of $2,000.The purpose of the option is to hedge against increases in the price of this type of plastic,"PET." The option is to buy 1,000,000 pounds of PET on March 1,2012 for $.75 per pound.If the market price of PET is below $.75 on March 1,Opie will let the option expire.If the market price is above $.75,then Opie will exercise the option.The option is to be settled net.Opie assumes a 6% annual borrowing rate.Assume this is a cash flow hedge. Required: Prepare the entry that Opie should record on September 1,2011.Then,assuming that the price of PET is $.72 on December 31,2011 (Opie's year end),prepare the entry that Opie should record.Finally,prepare the entries for March 1,2012,assuming that the price of PET is $.78.

When preparing their year-end financial statements,the Warner Company includes a footnote regarding their hedging activities during the year.Which of the following is not required to be disclosed?

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 December 31?

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 February 29?

On November 1,2010,Athom Corporation purchased 5,000 television sets for its merchandise inventory from Sockk,a South Korean firm,at a total quoted cost of 600,000,000 won (W).On this date,the spot rate for the won was $1 = 1,080W.On the same day,Athom invested $500,000 cash in a non-interest bearing account with a Japanese bank,to hedge its exposed liability position.The account payable to Sockk is due on January 30,2011.The exchange rates on December 31,2010 and January 30,2011 were $1 = 1,060W,and $1 = 1,030W,respectively.Athom agreed to pay Sockk in won.The bank deposit made by Athom will be held in won,but will be withdrawn in dollars by Athom on January 30th.Assume that Athom has a December 31 year-end.Assume this is a fair value hedge. Required: Prepare all the journal entries for Athom Corporation's General Journal on November 1,2010,December 31,2010,and January 30,2011.Round entries to the nearest whole dollar.If no entry is required on a particular date,indicate "No entry" in the General Journal.

On May 1,2011,Listing Corporation receives inventory items from their Bulgarian supplier.At the same time,Listing signed a forward contract to purchase 75,000 Bulgarian lev in sixty days to hedge the inventory purchase at $0.738,the 60-day forward rate.Payment for the inventory will be due in sixty days in Bulgarian lev.Assume the forward contract will be settled net and this qualifies as 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 May 31?

Which of the following hedging strategies would a business most likely use?

If a financial instrument is classified as a cash flow hedge,then

On March 1,2011,Amber Company sold goods to a foreign customer at a price of 50,000 foreign currency units.The customer will pay in three months.At the time of the sale,Amber paid $2,000 to acquire an option to sell 50,000 foreign currency units in three months at the strike price of $0.39.On May 30,2011,the customer sent in 50,000 foreign currency units.Quarterly financial reports are prepared on March 31.Ignore the time value of money.Relevant exchange rates are as follows: Required: Prepare the journal entries required for these transactions,if the foreign currency option is designated as a fair value hedge.

On November 1,2011,Ross Corporation,a calendar-year U.S.corporation,invested in a purely speculative contract to purchase 1 million euros on January 30,2012,from Trattoria Company,an Italian brokerage firm.Ross agreed to purchase 1,000,000 euros from Trattoria at a fixed price of $1.420 per euro.Trattoria agreed to transmit 1,000,000 euros to Ross on January 30,2012.Net settlement is not permitted.The spot rates for euros are: The 30-day futures rate for euros on December 31,2011 was $1.405. Required: Prepare the General Journal entries that Ross would record on November 1,December 31,and January 30.

On November 1,2011,Portsmith Corporation,a calendar-year U.S.corporation,invested in a purely speculative contract to purchase 1 million yen on January 30,2012,from the Karoke Trading Company,a Japanese brokerage firm.Portsmith agreed to purchase 1,000,000 yen from Karoke at a fixed price of $0.0100 per yen.Karoke agreed to transmit 1,000,000 yen to Portsmith on January 30.Net settlement is not permitted.The spot rates for yen are: The 30-day forward rate for yen on December 31,2011 was $0.0104. Required: Prepare the General Journal entries that Portsmith would record on November 1,December 31,and January 30.

The purchase price of an option contract is typically recorded as

A forward contract used as a cash flow hedge will be recorded as an asset if

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 January 30?

On June 1,2011,Dapple Industries purchases an option contract for $5,000 on 10,000 gallons of aviation gas to minimize its purchasing cost price exposure.At the time,the market price is $2.50 per gallon and the option price of $2 per gallon will expire 6 months later.Dapple can exercise the option at its discretion.When Dapple prepares quarterly reports on June 30,Dapple is still holding the option.On June 30,the market price of aviation gas is $4.50 per gallon.The option is to be settled net. On August 1,Dapple exercises the option when the gas market price is $5.00 per gallon and purchases 40,000 gallons of gas.On August 15,Dapple uses all of the gas on a charter flight. Required: What are Dapple's journal entries with regard to the aviation gas option? Assume this is a cash flow hedge.Ignore the time value of money.

On December 18,2011,Wabbit Corporation (a U.S.Corporation)has a Forward Contract recorded on their ledger as a debit balance of $17,500.The forward contract was related to a purchase of electronic components purchased overseas,which were going to be re-sold in the United States.On December 20,the forward contract was settled with a payment of $20,000,and the related parts which cost $118,000 were sold for $160,000 cash.The forward contract is set up to lock in the price for the electronic components when they are sold.The forward contract was settled net.Assume this is a cash flow hedge. Required: Prepare the journal entries required by Wabbit on December 20.

On November 1,2010,Ironside Company (a U.S.manufacturer)sold an airplane for 1 million New Zealand dollars (NZ$)to a New Zealand company,Wellington Corporation.Ironside will receive payment on January 30,2011 in New Zealand dollars.In order to hedge the accounts receivable position,Ironside entered into a 90-day forward contract on November 1,2010 to sell 1 million New Zealand dollars.On November 1,2010,the forward rate is US$0.79 per New Zealand dollar.The forward contract will be settled net.This is 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 is the fiscal year end.

Which of the following is not an approach appropriate for hedge accounting?