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12
Accounting for Foreign Currency
Transactions and Hedging Foreign
Exchange Risk
Slide
12-1
Learning
Learning Objectives
Objectives
Slide
12-2
Learning
Learning Objectives
Objectives
9. Explain how exchange gains and losses are reported for fair
value hedges and cash flow hedges.
Slide
12-3
Foreign
Foreign Currency
Currency Transactions
Transactions
Slide
12-4
Foreign
Foreign Currency
Currency Transactions
Transactions
Slide
12-5
Exchange
Exchange Rates—Means
Rates—Means of
of Translation
Translation
Slide
12-6
Exchange
Exchange Rates—Means
Rates—Means of
of Translation
Translation
Slide
12-7
Exchange
Exchange Rates—Means
Rates—Means of
of Translation
Translation
Spot Rate
Rate at which currencies can be exchanged today.
Slide
12-8
Exchange
Exchange Rates—Means
Rates—Means of
of Translation
Translation
Floating Rates
Relationship between major currencies is determined
by supply and demand factors.
Slide
12-10
LO 1 Measured versus denominated.
Foreign
Foreign Currency
Currency Transactions
Transactions
Foreign Currency Transaction - requires payment or
receipt (settlement) in a foreign currency.
Slide
12-11
LO 2 Foreign Currency Transactions.
Foreign
Foreign Currency
Currency Transactions
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.
12-13 LO 4 Three stages of concern.
Importing
Importing and
and Exporting
Exporting Transactions
Transactions
Exercise 12-2: Dec. 10, Sold seven office computers to a
company located in Colombia for 8,541,000 pesos. On this
date, the spot rate was 365 pesos per U.S. dollar. Prepare the
journal entry on the books of Teletex Systems, Inc. (periodic
method)
Slide
12-16 LO 3 Common transactions. LO 4 Three stages of concern.
Importing
Importing and
and Exporting
Exporting Transactions
Transactions
Exercise 12-2: During December of the current year,
Teletex Systems, Inc., a company based in Seattle,
Washington, entered into the following 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.
12-17 LO 4 Three stages of concern.
Importing
Importing and
and Exporting
Exporting Transactions
Transactions
Exercise 12-2: Dec. 12, Purchased computer chips from a
company domiciled in Taiwan. The contract was denominated in
500,000 Taiwan dollars. The direct exchange spot rate on
this date was $.0391. Prepare the journal entry on the books
of Teletex Systems, Inc.
Purchases 19,550
Accounts payable
19,550
Purchase price in Taiwan dollars 500,000
Slide
12-20 LO 3 Common transactions. LO 4 Three stages of concern.
Importing
Importing and
and Exporting
Exporting Transactions
Transactions
Slide
12-21 LO 3 Common transactions. LO 4 Three stages of concern.
Importing
Importing and
and Exporting
Exporting Transactions
Transactions
Slide
12-23 LO 5 Forward exchange contracts.
Importing
Importing and
and Exporting
Exporting Transactions
Transactions
2. Speculation
Forward contracts used to speculate changes in foreign
currency.
Slide
12-24 LO 5 Forward exchange contracts.
Using
Using Forward
Forward Contracts
Contracts as
as aa Hedge
Hedge
Hedge of a Foreign Currency Exposed Liability
Problem 12-2: Christel Exporting Co. is a U.S. wholesaler
engaged in foreign trade. The following transaction is
representative of its business dealings. The company uses a
periodic inventory system and is on a calendar-year basis. All
exchange rates are direct quotations.
Slide
12-25 LO 7 Forward contracts as a hedge.
Using
Using Forward
Forward Contracts
Contracts as
as aa Hedge
Hedge
Problem 12-2: (additional facts)
Spot rates and the forward rates for the Hong Kong dollar
were as follows:
Forward Rate
for
Spot Rate ($) April 1 Delivery
($)
Dec. 1 .1265 .1314
Dec. 29 .1240 .1305
12-26 Dec. 31 .1259LO 7 Forward contracts
.1308
Slide
as a hedge.
Using
Using Forward
Forward Contracts
Contracts as
as aa Hedge
Hedge
Problem 12-2: Prepare journal entries for the transactions
including the necessary adjustments on December 31.
Slide
12-27 LO 7 Forward contracts as a hedge.
Using
Using Forward
Forward Contracts
Contracts as
as aa Hedge
Hedge
Problem 12-2: Prepare journal entries for the transactions
including the necessary adjustments on December 31.
Slide
12-28 LO 7 Forward contracts as a hedge.
Using
Using Forward
Forward Contracts
Contracts as
as aa Hedge
Hedge
Problem 12-2: Prepare journal entries for the transactions
including the necessary adjustments on December 31.
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
12-34 LO 7 Forward contracts as a hedge.
Using
Using Forward
Forward Contracts
Contracts as
as aa Hedge
Hedge
Slide
12-35 LO 7 Forward contracts as a hedge.
Using
Using Forward
Forward Contracts
Contracts as
as aa Hedge
Hedge
Fair Value Hedge—Hedging an Unrecognized Foreign
Currency Commitment
A U.S. firm, at a date earlier than the transaction date,
may make a commitment to a foreign company to buy or
sell goods at a price established in foreign currency.
Slide
12-36 LO 7 Forward contracts as a hedge.
Using
Using Forward
Forward Contracts
Contracts as
as aa Hedge
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
12-37 LO 7 Forward contracts as a hedge.
Using
Using Forward
Forward Contracts
Contracts as
as aa Hedge
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
* [(10,000 ´ ($9.44 - $9.47)] =$300
Sales (10,000 x 9.48)
Slide
12-39 94,800 LO 7 Forward contracts as a hedge.
Using
Using Forward
Forward Contracts
Contracts as
as aa Hedge
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.
Slide
40,000
12-40 LO 7 Forward contracts as a hedge.
Using
Using Forward
Forward Contracts
Contracts as
as aa Hedge
Hedge
Investment in FC 104,000
Dollars Payable to Exchange Dealer 101,000
Cash
101,000
FC Receivable from Exchange Dealer
104,000
Slide
LO 7 Fair value hedge vs. cash flow hedge.
12-44
Feb. 1 Equipment 104,000
Using
Using Forward
Forward Contracts
Contracts as
as aa Hedge
Hedge
Slide
12-47 LO 8 Derivatives used as a hedge.
Copyright
Copyright
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information contained herein.
Slide
12-48