Exam 13: Accounting for Derivatives and Hedging Activities

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: When the market price is... November 1,2014 \ 60.00 per barrel December 31,2014 \ 65.00 per barrel January 31,2015 \ 62.00 per barrel

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 U.S.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.

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?

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 13,2015.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 a company attempts to control the impact of price fluctuations on its future cash flows and its sales,it is entering into a cash-flow hedge.

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?

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 March 1?

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 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 U.S.$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.

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.

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

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?

A cash-flow hedge attempts to limit a company's exposure to price changes in forecasted purchases.

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

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.

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.

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?

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.

Hedge accounting is designed to record changes in the value of the hedged item and in the value of the hedging instrument in the same accounting period.

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?