Exam 13: Accounting for Derivatives and Hedging Activities

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 February 29?

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 December 31?

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

On January 1,2014,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 31,2014,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 31,2014,and prepare the related journal entry required to document this hedge and the related interest payment at December 31,2014.Assume the interest rate curve is flat.

On November 1,2013,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 30,2014.The exchange rates on December 31,2013 and January 30,2014 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 1,2013,December 31,2013,and January 30,2014.Round entries to the nearest whole dollar.If no entry is required on a particular date,indicate "No entry" in the General Journal.

The purchase price of an option contract is typically recorded as

On June 1,2014,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.

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

Opie Industries is a manufacturer of plastic bottles.On September 1,2014,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 1,2015 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 1,2014.Then,assuming that the price of PET is $.72 on December 31,2014 (Opie's year end),prepare the entry that Opie should record.Finally,prepare the entries for March 1,2015,assuming that the price of PET is $.78.

On March 1,2014,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 30,2014,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.

Slickton Corporation,a U.S.holding company,enters into a forward contract on November 1,2014 to speculate in Singapore dollars (S$).The forward contract requires Slickton to sell 1,000,000 Singapore dollars to the exchange broker on January 30,2015.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 1,2014,December 31,2014 (year end),and January 30,2015.

On December 15,2014,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 15,2014,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 15,2014,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 31,2014 if the hedge is a cash flow hedge.Round to the nearest whole dollar. 2.Show the required entries on December 31,2014 if the hedge is a fair value hedge.Round to the nearest whole dollar.

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?

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

On November 1,2013,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 30,2014 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 30,2014.On November 1,2013,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 1,2013,December 31,2013 and January 30,2014. December 31,2013 is the fiscal year end.

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 December 31,2014?

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?

Ivan has 14,000 barrels of oil that were purchased a month ago at $50.00 per barrel.On November 1,2014 Ivan hedges the value of the inventory by entering into a forward contract to sell 14,000 barrels of oil on January 31,2015 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:

On November 1,2014,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 30,2015 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 1,2014? 2.What journal entries did Moddel record on December 31,2014? 3.What journal entries did Moddel record on January 30,2015 if the purchase was made?

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?