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12-1
12
Accounting for Foreign Currency
Transactions and Hedging
Foreign Exchange Risk
Slide
12-2
Learning Objectives
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12-3
Learning Objectives
9. Explain how exchange gains and losses are reported for fair
value hedges and cash flow hedges.
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12-4
Foreign Currency Transactions
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12-5
Foreign Currency Transactions
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12-6
Exchange Rates—Means of Translation
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12-7
Exchange Rates—Means of Translation
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12-8
Exchange Rates—Means of Translation
Spot Rate
Rate at which currencies can be exchanged today.
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12-9
Exchange Rates—Means of Translation
Floating Rates
Relationship between major currencies is determined
by supply and demand factors.
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12-11
LO 1 Measured versus denominated.
Foreign Currency Transactions
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12-12
LO 2 Foreign Currency Transactions.
Foreign Currency Transactions
Inventory delivered
12/10/Year 1
U.S. firm
Columbia firm
(Teletex)
8,541,000 pesos
received on 1/10/Year 2
Slide LO 3 Common transactions.
12-14 LO 4 Three stages of concern.
Importing and Exporting Transactions
Slide
12-17 LO 3 Common transactions. LO 4 Three stages of concern.
Importing and Exporting Transactions
Inventory received
12/12/Year 1
U.S. firm
Taiwan firm
(Teletex)
500,000 Taiwan dollars
paid on 1/10/Year 2
Slide LO 3 Common transactions.
12-18 LO 4 Three stages of concern.
Importing and Exporting Transactions
Purchases 19,550
Accounts payable 19,550
Slide
12-21 LO 3 Common transactions. LO 4 Three stages of concern.
Importing and Exporting Transactions
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12-22 LO 3 Common transactions. LO 4 Three stages of concern.
Importing and Exporting Transactions
Slide
12-24 LO 5 Forward exchange contracts.
Importing and Exporting Transactions
2. Speculation
Forward contracts used to speculate changes in foreign
currency.
Slide
12-25 LO 5 Forward exchange contracts.
Using Forward Contracts as a Hedge
Slide
12-26 LO 7 Forward contracts as a hedge.
Using Forward Contracts as a Hedge
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12-28 LO 7 Forward contracts as a hedge.
Using Forward Contracts as a Hedge
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12-29 LO 7 Forward contracts as a hedge.
Using Forward Contracts as a Hedge
Slide
12-34 LO 7 Forward contracts as a hedge.
Using Forward Contracts as a Hedge
Transaction Transaction
Hedged Item Balance Gain/(Loss) Hedge Balance Gain/(Loss)
Accounts Payable FC Receivable
Dec. 1 $ 26,565 Dec. 1 $ 27,594
Dec. 31 26,439 $ 126 Dec. 31 27,468 $ (126)
Apr. 1 30,030 (3,591) Apr. 1 30,030 2,562
Total gain/(loss) $ (3,465) $ 2,436
Slide
12-35 LO 7 Forward contracts as a hedge.
Using Forward Contracts as a Hedge
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12-36 LO 7 Forward contracts as a hedge.
Using Forward Contracts as a Hedge
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12-37 LO 7 Forward contracts as a hedge.
Using Forward Contracts as a Hedge
Exercise 12-14: Consider the following information:
1. On December 1, 2008, a U.S. firm contracts to sell equipment
(with an asking price of 10,000 pesos) in Mexico. The firm will
take delivery and will pay for the equipment on March 1, 2009.
2. On December 1, 2008, the company enters into a forward
contract to sell 10,000 pesos for $9.48 on March 1, 2009.
3. Spot rates and the forward rates for March 1, 2009,
settlement were as follows (dollars per peso):
Spot Rate Forward Rate
December 1, 2008 $9.54 $9.48
Balance sheet date (12/31/08) 9.49 9.44
March 1, 2009 9.47
4. On March 1, the equipment was sold for 10,000 pesos. The cost
of the equipment was $40,000.
Slide
12-38 LO 7 Forward contracts as a hedge.
Using Forward Contracts as a Hedge
Exercise 12-14: Prepare all journal entries needed on December
1, December 31, and March 1 to account for the forward contract,
the firm commitment, and the transaction to sell the equipment.
Investment in FC 94,700
Firm Commitment 100
Sales (10,000 x 9.48) 94,800
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12-41 LO 7 Forward contracts as a hedge.
Using Forward Contracts as a Hedge
Investment in FC 104,000
Dollars Payable to Exchange Dealer 101,000
Cash 101,000
FC Receivable from Exchange Dealer 104,000
Feb. 1 Equipment 104,000
Investment in FC 104,000
Slide
12-45 LO 7 Fair value hedge vs. cash flow hedge.
Using Forward Contracts as a Hedge
Slide
12-48 LO 8 Derivatives used as a hedge.
Copyright
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contained herein.
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