A U.S. company reports a forward contract as a cash flow hedge of a forecasted purchase of merchandise, payment to be made in Hong Kong dollars. How is hedge accounting used in this situation? Select one: a. Hedge accounting is used for both the forecasted purchase and the forward contract. b. Normal accounting is used for both the forecasted purchase and the forward contract. c. Hedge accounting is used for the forward contract. The forecasted purchase is reported normally. d. Hedge accounting is used for the forecasted purchase. The forward contract is reported normally.
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The company is using a forward contract as a cash flow hedge to manage the risk of changes in the foreign currency (Hong Kong dollars) related to a forecasted purchase of merchandise. Show more…
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A U.S. company anticipates that it will sell merchandise for €100,000 at the end of August and receive payment for it at the end of October. On May 1, when the spot rate is $1.20 and the forward rate for delivery on October 31 is $1.21, the company enters a forward contract to sell €100,000 on October 31. The forward contract qualifies as a cash flow hedge of the forecasted sale. The company sells the merchandise on August 30, when the spot rate is $1.232 and the forward rate for October 31 delivery is $1.23, and receives payment of €100,000 and closes the forward contract on October 31, when the spot rate is $1.24. The company has a December 31 year-end. What is the net exchange gain/loss for the year related to this transaction? A. $200 net gain B. $1,800 net loss C. $200 net loss D. $-0-
Akash M.
On September 1, Year 1, Keefer Company received an order to sell a machine to a customer in Canada at a price of 100,000 Canadian dollars. The machine was shipped and payment was received on March 1, Year 2. On September 1, Year 1, Keefer Company purchased a put option giving it the right to sell 100,000 Canadian dollars on March 1, Year 2, at a price of $75,000. Keefer Company properly designates the option as a fair value hedge of the Canadian-dollar firm commitment. The option cost $1,700 and had a fair value of $2,800 on December 31, Year 1. The fair value of the firm commitment is measured through reference to changes in the spot rate. The following spot exchange rates apply: Date U.S. Dollar per Canadian Dollar September 1, Year 1 . . . . . . .$0.75 December 31, Year 1 . . . . . .0.73 March 1, Year 2 . . . . . . . . . .0.71 Keefer Company's incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent (1 percent per month) is 0.9803 What was the net impact on Keefer Company's Year 2 income as a result of this fair value hedge of a firm commitment? a. $0. b. An $839.40 decrease in income. c. A $74,160.60 increase in income. d. A $76,200.00 increase in income. 8. What was the net increase or decrease in cash flow from having purchased the foreign currency option to hedge this exposure to foreign exchange risk? a. $0. b. A $1,000 increase in cash flow. c. A $1,700 decrease in cash flow. d. A $2,300 increase in cash flow.
On October 1, 2018, Aquaman Company purchased inventory from Storm Surge Corporation for euro (€) 200,000, with payment due on February 1, 2019. On October 1, 2018, Storm Surge delivered the inventory to Aquaman from its Toronto warehouse. Aquaman immediately hedged €170,000 of the payable by buying a forward contract (at no cost) expiring on February 1, 2019. The following exchange rates occurred during the period (the forward rates shown all pertain to forward contracts expiring on February 1, 2019): Spot Rate: October 1, 2018: €1 = C$1.40 December 31, 2018: €1 = C$1.48 February 1, 2019: €1 = C$1.52 Forward Rate: October 1, 2018: €1 = C$1.50 December 31, 2018: €1 = C$1.59 February 1, 2019: €1 = C$1.52 REQUIRED: a) Indicate how the hedge entered into by Aquaman on October 1, 2018 should be classified. Support your answer with facts from the question and discuss how effective this hedge would be. (3 marks) b) Prepare the journal entries or disclosure to be recorded by Aquaman for the accounts payable and the fair value hedge on the following dates: (8 marks) i) October 1, 2018 ii) December 31, 2018 iii) February 1, 2019 c) Calculate the exchange gain or loss on both the accounts payable and the forward contract to be reported for the year ended December 31, 2019 (January 1 - December 31, 2019) (2 marks).
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