International Accounting
International Accounting
5th Edition
ISBN: 9781259747984
Author: Doupnik, Timothy S., Finn, Mark T., Gotti, Giorgio
Publisher: Mcgraw-hill Education,
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Chapter 6, Problem 15EP

a.

To determine

Record journal entries and determine effect on net income using cash flow hedge.

a.

Expert Solution
Check Mark

Explanation of Solution

Cash Flow Hedging:

Companies use cash flow hedge to minimise the variability in cash flows of assets or liabilities or forecasted transactions caused by fluctuations in foreign currency exchange rates, commodity prices  or interest rates.

Recording purchase:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/1/Y1Inventory 20,000 
         Accounts payable  20,000
 (to record purchase)   

Table (1)

  • Since, inventory is an asset and assets are increased. Hence, accounts receivable is debited.
  • Since, accounts payable is a liability and liabilities are increased. Hence, accounts payable is credited.

No entry for forward contract

Recording foreign exchange loss:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/31/Y1Foreign exchange loss 1,000 
         Accounts payable  1,000
 (to record foreign exchange loss)   

Table (2)

  • Since, Foreign exchange loss is a loss and losses are increased. Hence, Foreign exchange loss is debited.
  • Since, accounts payable is a liability and liabilities are increased. Hence, accounts payable is credited.

Recording gain on forward contract:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/31/Y1AOCI 1,000 
         Gain on forward contract  1,000
 (to record gain on forward contract)   

Table (3)

  • Since, AOCI i is a liability and liabilities are decreased. Hence, AOCI is debited.
  • Since, gain on forward contract is a gain and gains are increased. Hence, gain on forward contract is credited.

Recording AOCI:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/31/Y1Forward contract 1,176.36 
         AOCI  1,176.36
 (to record AOCI)   

Table (4)

  • Since, forward contract is a revenue and revenues are increased. Hence, forward contract is debited.
  • Since, AOCI is a liability and liabilities are increased. Hence, AOCI is credited.

Recording premium expense:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/31/Y1Premium expense 266.67 
         AOCI  266.67
 (to record premium expense)   

Table (5)

  • Since, premium expense is an expense and expenses are increased. Hence, premium expense is debited.
  • Since, AOCI is a liability and liabilities are increased. Hence, AOCI is credited.

Recording foreign exchange loss:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

3/1/Y2Foreign exchange loss 1,400 
         Accounts payable  1,400
 (to record foreign exchange loss)   

Table (6)

  • Since, Foreign exchange loss is a loss and losses are increased. Hence, Foreign exchange loss is debited.
  • Since, accounts payable is a liability and liabilities are increased. Hence, accounts payable is credited.

Recording gain on forward contract:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

3/1/Y2AOCI 1,400 
         Gain on forward contract  1,400
 (to record gain on forward contract)   

Table (7)

  • Since, AOCI is a liability and liabilities are decreased. Hence, AOCI is debited.
  • Since, gain on forward contract is a gain and gains are increased. Hence, gain on forward contract is credited.

Recording AOCI:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

3/1/Y2Forward contract 423.64 
         AOCI  423.64
 (to record AOCI)   

Table (8)

  • Since, AOCI is a liability and liabilities are decreased. Hence, AOCI is debited.
  • Since, forward contract is a revenue and revenue is decreased. Hence, forward contract is credited.

Recording premium revenue:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/31/Y1Premium expense 533.33 
         AOCI  533.33
 (to record premium expense)   

Table (9)

  • Since, premium expense is an expense and expenses are increased. Hence, premium expense is debited.
  • Since, AOCI is a liability, liabilities increased. Hence, AOCI is credited.

Recording payment:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/31/Y1Foreign currency 22,400 
         Cash  20,800
         Forward contract  1,600
 (to record accounts payable)   

Table (10)

  • Since, foreign currency is an asset and assets are increased. Hence, foreign currency is debited.
  • Since, cash is an asset and assets are decreased. Hence, cash account is credited.
  • Since, forward contract is a revenue and revenue is decreased. Hence, forward contract is credited.

Recording accounts Payable:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/31/Y1Accounts payable 22,400 
         Foreign currency  22,400
 (to record accounts payable)   

Table (11)

  • Since, accounts payable is a liability and liabilities are decreased. Hence, accounts payable is debited.
  • Since, foreign currency is an asset and assets are decreased. Hence, foreign currency is credited.

Recording cost of goods sold:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

3/15/Y2Cost of goods sold 20,000 
         Inventory  20,000
 (to record COGS)   

Table (12)

  • Since, cost of goods sold is revenue and revenue is increased. Hence, cost of goods sold is debited.
  • Since, inventory is an asset and assets are decreased. Hence, inventory is credited.

Impact on net income can be calculated below:

Year 1

Netincome=Income/gainsexpense/loss

Substitute $1,000 for gain and $1,000 and $266.67 for loss in the formula,

Netincome=$1,000$1,000$266.67=$266.67

Year 2

Netincome=Sales+income/gainsexpense/loss

Substitute $1400 for gain, $1400, $533.33 and $20,000 for loss in the formula,

Netincome=$1,400$1,400$533.33$20,000=$20,533.33

Impact on income over both accounting period is $20,800.

Working Note:

Conversion of sale from crown to USD

Sales(inUSD)=Salevalue(incrown)×USDpercrown=20,000×$1=$20,000

Computation of foreign exchange gain in USD:

Foreignexchangegain=Difference×Salevalue=($1.05$1.00)×$20,000=$1,000

Computation of net income of both accounting periods:

Netincome(Year1and2)=Netincome(Year1)+Netincome(Year2)=($20,533.33)+($266.67)=$20,800

b.

To determine

Record journal entries and determine effect on net income using fair value hedge.

b.

Expert Solution
Check Mark

Explanation of Solution

Fair Value Hedge:

A fair value hedge exists if changes in exchange rates can affect the fair value of an asset or liability reported on the balance sheet. To qualify for hedge accounting, the fair value risk must have the potential to affect net income if it is not hedged.

Recording purchase:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/1/Y1Inventory 20,000 
         Accounts payable  20,000
 (to record purchase)   

Table (13)

  • Since, inventory is an asset and assets are increased. Hence, accounts receivable is debited.
  • Since, accounts payable is a liability and liabilities are increased. Hence, accounts payable is credited.

No entry for forward contract

Recording foreign exchange loss:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/31/Y1Foreign exchange loss 1,000 
         Accounts payable  1,000
 (to record foreign exchange loss)   

Table (14)

  • Since, Foreign exchange loss is a loss and losses are increased. Hence, Foreign exchange loss is debited.
  • Since, accounts payable is a liability and liabilities are increased. Hence, accounts payable is credited.

Recording gain on forward contract:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/31/Y1Forward contract 1,000 
         Gain on forward contract  1,000
 (to record gain on forward contract)   

Table (15)

  • Since, AOCI is a liability and liabilities are decreased. Hence, AOCI is debited.
  • Since, gain on forward contract is a gain and gains are increased. Hence, gain on forward contract is credited.

Recording foreign exchange loss:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

3/1/Y2Foreign exchange loss 1,400 
         Accounts payable  1,400
 (to record foreign exchange loss)   

Table (16)

  • Since, Foreign exchange loss is a loss and losses are increased. Hence, Foreign exchange loss is debited.
  • Since, accounts payable is a liability and liabilities are increased. Hence, accounts payable is credited.

Recording gain on forward contract:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

3/1/Y2Forward contract 1,400 
         Gain on forward contract  1,400
 (to record gain on forward contract)   

Table (17)

  • Since, forward contract is a revenue and revenue is increased. Hence, forward contract is debited.
  • Since, gain on forward contract is a gain and gains are increased. Hence, gain on forward contract is credited.

Recording accounts Payable:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

12/31/Y1Accounts payable 22,400 
         Foreign currency  22,400
 (to record accounts payable)   

Table (18)

  • Since, accounts payable is a liability and liabilities are decreased. Hence, accounts payable is debited.
  • Since, foreign currency is an asset and assets are decreased. Hence, foreign currency is credited.

Recording cost of goods sold:

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

3/15/Y2Cost of goods sold 20,000 
         Inventory  20,000
 (to record COGS)   

Table (19)

  • Since, cost of goods sold is revenue and revenue is increased. Hence, cost of goods sold is debited.
  • Since, inventory is an asset amd assets are decreased. Hence, inventory is credited.

Impact on net income can be calculated below:

Year 1

Netincome=Income/gainsexpense/loss

Substitute $1,176.36 for gain and  $1,000 for loss in the formula,

Netincome=$1,176.36$1,000=$176.36

Year 2

Netincome=Income/gainsexpense/loss

Substitute $423.64 for gain and $1400 and $20,000 for loss in the formula,

Netincome=$423.64$1,400$20,000=$20,976.36

Impact on income over both accounting period is $20,800.

Working Note:

Conversion of sale from crown to USD

Sales(inUSD)=Salevalue(incrown)×USDpercrown=20,000×$1=$20,000

Computation of foreign exchange gain in USD:

Foreignexchangegain=Difference×Salevalue=($1.05$1.00)×$20,000=$1,000

Computation of net income of both accounting periods:

Netincome(Year1and2)=Netincome(Year1)+Netincome(Year2)=$176.36+($20,976.36)=$20,800

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Chapter 6 Solutions

International Accounting

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