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Accounting Problem 6-1, 6-3 Solution




Question;Jarvis Corporation transacts business with a number of;foreign vendors and customers. These transactions are denominated in FC;and the company uses a number of hedging strategies to reduce the;exposure to exchange rate risk. Several such transactions are as follows;Transaction A: On November 30, the company;purchased inventory from a vendor in the amount of 100,000 FC with;payment due in 60 days. Also on November 30, the company purchased a forward;contract to buy FC in 60 days. Changes in the value of the commitment are;based on changes in forward rates.;Transaction B: On November 1, the company;committed to provide services to a foreign customer in the amount of 100,000;FC. The services will be provided in 30 days. On November;1, the company also purchased a forward contract;to sell 100,000 FC in 30 days.;Transaction C: On November 1, the company;forecasted a purchase of equipment in 30 days. The forecasted cost is;100,000 FC, and the equipment is to be depreciated over?ve years using the;straight-line method of depreciation. On November 1, the company acquired a;forward contract to buy 100,000;FC in 30 days.;Transaction D: On November 30, the company;purchased an option to sell 100,000 FC in 60 days to hedge a forecasted;sale to a customer in 60 days. The option sold for a premium of $1,200 and had;a strike price of $1.155. The value of the option on December 31 was;$2,000.;The time value of all hedging instruments is;excluded from the assessment of hedge effectiveness. Relevant spot and forward;rates are as follows;Spot Rate Forward Rate for 30;Daysfrom November 1 Forward Rate for 60;Daysfrom November 30;ovember 1............... 1 FC ? $1.12 1FC;? $1.132;November 15.............. 1 FC ? $1.13;November 30.............. 1 FC ? $1.15 1;FC ?$1.146;December 31............... 1 FC ? $1.14 1;FC ?$1.138;Assuming that the company?s year-end is December;31, for each of the above transactions determine the current-year effect;on earnings. All necessary discounting should be determined by using a;6% discount rate. For transactions C and D, the time value of the hedging;instrument is excluded from hedge effectiveness and is to be separately;accountedIncome statement effect of transactions, commitments,& hedging. Clayton industries sells medical equipment worldwide. On Mar 1 of the current year, the company sold equipment, with a cost of $160,000 to a foreign customer for 200,000 euros payable in 60 days. At the same time, the company purchased a forward contract to sell 200,000 euros in 60 days. In another transaction, the company committed, on Mar 15, to deliver equipment in May to a foreign customer in exchange for 300,000 euros payble in June. This equipment is anticipated to have a completed cost of $210,000. On Mar 15, the company hedged the commitment by acquiring a forward contract to sell 300,000 in 90 days. Changes in the value of the commitment are based on changes in forward rates & all discounting is based on a 6% discount rate.Various spot and forward rates for the euro are as follows: Spot rate Forward rate fo 60 days from Mar 1 Forward rate for 90 days from Mar 15Mar 1 $1.180 $1.181 Mar 15 1.181 1.180 $ 1.179Mar 31 1.179 1.178 1.177Apr 30 1.175 1.174For individual months of Mar & Apr calculate the income statement effects of:1. the foreign currency transaction2. the hedge on the foreign currency transaction.3. the foreign currency commitment.4. the hedge on the foregin currency commitment.


Paper#42309 | Written in 18-Jul-2015

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