Exam 13: Accounting for Derivatives and Hedging Activities

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

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?

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.

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?

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

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?

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 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.

FASB ASC Topic 830 requires marking to fair-value foreign currency-denominated receivables and payables at period-end.

If an existing asset is being hedged,it and the derivative are marked to fair value at the end of every month.

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?

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.

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.

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 1,2014).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.

Two approaches to be used to determine hedge effectiveness include critical term analysis and statistical analysis.

The purchase price of an option contract is typically recorded as

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 U.S.$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.

Formal documentation defining the relationship between a hedged item and the derivative instrument must be prepared to qualify for hedge accounting.

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.

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.