Introduction:
Derivatives designed as a hedge: To reduce risks, ASC 815 provides specific requirements for classifying derivative as a hedge. Hedge accounting offsets the gain or loss on the hedged instrument. Hedges can be used to offset foreign currency exchange rate risk, interest rate risk and commodity risks. A derivative instrument in order to qualify as a hedge must have sufficient documentation at the beginning of the hedge term to identify the objective of the hedge. The hedge must be highly effective throughout its term, the effectiveness must be tested every three months and each time the financial instrument is prepared.
The entries when company uses the forward exchange rate to measure hedge effectiveness.
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EBK ADVANCED FINANCIAL ACCOUNTING
- The following information are the import transaction between Peerless Products and Tokyo Industries: On August 1, 20X1, Peerless contracts to purchase special-order goods from Tokyo Industries. Their manufacture and delivery will take place in 60 days (on October 1, 20X1). The contract price is 2,000,000 yen.. Timing USD/YEN Hedge Commencement 0.0065 30 days later (first reporting date) 0.0075 • 60 days later (purchase takes place and the payment is made) 0.0070 Required: prepare the journal entry based on the given informationarrow_forwardQuestion 1: During December 2019 of the current year, Wiley Systems, Inc., a company based in Seattle, Washington, entered into the following transactions: Dec. 12: Purchased computer chips from a Taiwan company. Contract was denominated in 125,000 Taiwan dollars. Direct exchange rate on this date was $.0391. Inventory received 12/12/2019 and 125,000 Taiwan dollars paid on 1/10/2020 Assume that on December 31 the direct exchange rates was Taiwan dollar $.0351. Assume that the direct exchange rate on the settlement date was Taiwan dollar $.0398. a) Prepare the journal entry for purchase on the books of Wiley Systems, Inc. b) Prepare journal entry necessary to adjust the account as of December 31 c) Prepare journal entry to record settlement of account on January 10. Prepare journal entry to record settlement of account on January 10.arrow_forwardProblem 2: Old Colonial Corp. (a U.S. company) made a sale to a foreign customer on September 15, 2018, for 100,000 stickles. Payment was received on October 15, 2018. The following exchange rates applied: Date Rate Date Rate Date Rate Sept. 15, 2018 51-5.48 Sept 30, 2018 51-5.50 Oct. 15, 2018 51-5.44 Required: Prepare all journal entries for Old Colonial Corp. in connection with this sale assuming that the company closes its books on September 30 to prepare interim financial statements.arrow_forward
- On November 1, 20x2, Irvin Corp. sold goods to John Company for 130,000 rupee. Payment is due on March 30, 20x3. Also on November 1, 20x2, Irvin Corp. entered into a forward contract to sell 130,000 rupees on March 1, 20x3. The following are the exchange rates: Dec. 31, Nov. 1, 20x2 Mar. 30, 20x3 20x2 Spot rates 0.82 0.80 0.87 Forward rate 0.85 0.86 0.88 Irvin's incremental borrowing rate is 8%. What is the forex gain or loss on hedge item? 2,600 loss O 1,300 gain O 1,300 loss O 2,600 gainarrow_forwardOn November 1, 20x2, Irvin Corp. sold goods to John Company for 130,000 rupee. Payment is due on March 30, 20x3. Also on November 1, 20x2, Irvin Corp. entered into a forward contract to sell 130,000 rupees on March 1, 20x3. The following are the exchange rates: Dec. 31, Nov. 1, 20x2 Mar. 30, 20x3 20x2 Spot rates 0.82 0.80 0.87 Forward rate 0.85 0.86 0.88 Irvin's incremental borrowing rate is 8%. What is the net impact on Irvin's income in 20x3 as a result of this hedge? O 2,583 net gain O 7,800 net gain O 2,600 net gain O 7,783 net gainarrow_forwardThe entity sold its inventory to a foreign entity with credit term of n/60. On the 60th day from invoice, the entity accepted the $200 payment from a client. It converted this amount on the spot rate. The entity's approach to the foreign exchange risk is A. AvoidanceB. MitigationC. Acceptancearrow_forward
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- Suppose that two counterparties, A and B, enter a three-month forward contract on January 1st, whereby A buys USD1 million at a forward rate of AUD/USD 1.7662. On March 1st, A decides it no longer needs to buy USD1 million on 31 March, so it enters a one-month forward contract to sell USD1 million on 31 March at a forward rate of AUD/USD 1.8000 from counterparty C. a) Calculate the net cost to counterparty A, before transaction costs. b) Suppose a German importer owes an Australian exporting company 150,000 AUD, due in three months. ?_0 (EUR/AUD) 0.60 Se (EUR/AUD) 0.50 (0.3) and 0.65 (0.7) Premium on AUD call option R = EUR0.02 Exercise exchange rate E = 0.62 Time to expiry 3 months 1) What is the expected spot rate? 2) What is the expected value of payables in AUD under hedge? 3) Will the option to hedge be undertaken on the basis of…arrow_forwardOn June 1 Hammer Company purchased inventory from a foreignsupplier at a price of 75,000 FCU (FCU is “foreign currency units”)Hammer will make payment in three months on September 1.On June 1, Hammer entered into a forward contractmaturing on September 1 as a fair value hedgeof its FCU lliability.Prepare all journal entries, including adjusting entries, to recordthe transaction and the forward contract.Date Spot rate Forward rate*June 1 $0.80 $0.85June 30 $0.83 $0.84Sept. 1 $0.86*Forward rate is for a contract written on June 1 to mature on September 1.(Disregard the impact of any interest factor or discount rate.) please provide table? first journal entry is no entry.arrow_forwardOn November 1, 2020, Americo, Corporation sold wine on credit to Venezia Company for €800,000. Payment is not due for 120 days. Thus, the transaction will be settled on February 28, 2021. On November 1, 2020, Americo, Corporation also entered a 120-day forward contract to sell €800,000. The forward contract is not designated as a hedge. The direct exchange rates were as follows: SPOT FORWARD 11/1/2020 $ 1.22 $ 12/31/2020 $ 1.18 $ 2/28/2021 $ 1.19 1.24 (120 days) 1.17 (60 days)arrow_forward
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