Exam 13: Accounting for Derivatives and Hedging Activities

On November 1,2014,Ross Corporation,a calendar-year U.S.corporation,invested in a purely speculative contract to purchase 1 million euros on January 30,2015,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 30,2015.Net settlement is not permitted.The spot rates for euros are: The 30-day futures rate for euros on December 31,2014 was $1.405. Required: Prepare the General Journal entries that Ross would record on November 1,December 31,and January 30.

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

Onoly Corporation (a U.S.manufacturer)sold parts to its customer in Hong Kong on December 8,2014 with payment of 500,000 Hong Kong Dollars (HKD)to be received in sixty days on February 6,2015.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 2014,and in 2015? 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 2014,and in 2015?

On November 1,2013,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 30,2014.To hedge against rapid changes in the peso,Mayberry entered into a forward contract on November 1,2013 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 30,2014. 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 31,2013 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.

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

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

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

On November 1,2013,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 30,2014 in New Zealand dollars.In order to hedge the accounts receivable position,Ironside entered into a 90-day forward contract on November 1,2013 to sell 1 million New Zealand dollars.On November 1,2013,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 1,2013,December 31,2013 and January 30,2014. December 31 is the fiscal year end.

Use the following information to answer the question(s)below. On November 2,2014,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 December 18,2014,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 January 1,2014,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 31,2014,it is determined that Bosna's interest rate to Lenda for 2015 will be 6%.At December 31,2015,the interest rate for 2016 was determined to be 8%.Treat as a cash flow hedge. Required: Determine the estimated fair value of the hedge at December 31,2014,and prepare the related journal entries required to document this hedge and the related interest payments at December 31,2014,2015,and 2016,including final repayment on 12/31/16.Assume a flat interest rate curve.

Wild West,Incorporated (a U.S.corporation)sold inventory to a company in the Philippines for 1,600,000 pesos on account on February 1,2014,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.

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

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?

Use the following information to answer the question(s)below. On November 2,2014,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 November 1,2014,Portsmith Corporation,a calendar-year U.S.corporation,invested in a purely speculative contract to purchase 1 million yen on January 30,2015,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 31,2014 was $0.0104. Required: Prepare the General Journal entries that Portsmith would record on November 1,December 31,and January 30.

On May 1,2014,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?

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.

Astrotuff Company is planning to purchase 200,000 pounds of nylon from Tangsun Company.On November 1,2014,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 1,2014,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 31,2014,Astrotuff's year end,the forward rate to January 30,2015 is $1.78 per pound.The spot and forward rates on January 30,2015 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.

Use the following information to answer the question(s)below. On December 1,2014,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?