Solutions- Chapter 10

Problem 10-1
a)
January 10, Year 1
Cash 11,600
Deferred revenue (US$10,000 x 1.16) 11,600

March 17, Year 1

Accounts receivable (US$90,000 x 1.17) 105,300
Deferred revenue 11,600
Sales 116,900

May 1, Year 1
Land (US$200,000 x 1.19) 238,000
Cash (US$100,000 x 1.19) 119,000
Accounts payable (US$100,000 x 1.19) 119,000

June 30, Year 1

Accounts receivable (US$90,000 x [1.23 – 1.17]) 5,400
Exchange gain 5,400

Exchange loss 4,000

Accounts payable (US$100,000 x [1.23 – 1.19]) 4,000

Interest expense (US$100,000 x 6% x 2/12 x [1.23 + 1.19] / 2) 1,210

Exchange loss 20
Interest payable (US$100,000 x 6% x 2/12 x 1.23) 1,230

July 31, Year 1

Accounts receivable (US$90,000 x [1.25 – 1.23]) 1,800
Exchange gain 1,800

Cash (US$90,000 x 1.25) 112,500

 Accounts receivable 112,500

b)
The market value of the land at June 30, Year 1 is C$258,300 (US$210,000 x 1.23).

Problem 10-3
May 1 & 2, Year 1
Memorandum Entries
JDH ordered equipment from a German supplier for €100,000 with delivery on October 1, Year
1 and payment due December 31, Year 1.
Company entered into a forward contract to receive €100,000 from the bank in exchange for a
payment of $138,000 to the bank on December 31, Year 1. The receipt of €100,000 from the
bank will offset the payable to the supplier.

October 1, Year 1
Forward contract (€100,000  [1.39  1.38]) 1,000
Other comprehensive income  exchange gains and losses 1,000
To adjust forward contract to October 1 forward rate

Equipment (€100,000  1.37) 137,000

Accounts payable (€) 137,000

Other comprehensive income  exchange gains and losses 1,000

Equipment 1,000
To clear other comprehensive income into equipment account

December 31, Year 1

Exchange gains and losses (€100,000  [1.39  1.36]) 3,000
Forward contract 3,000
To adjust forward contract to December 31 forward rate

Accounts payable (€100,000  [1.37  1.36]) 1,000

Exchange gains and losses 1,000
Problem 10-4
(a) (i)
December 1, Year 5
Inventory 38,500
Accounts Payable (MXN) 38,500
(MXN500,000  .077)
Recognize the purchase of the paintings

(ii)
December 31, Year 5
Revalue the payable which is a monetary liability
Accounts payable (MXN) 1,000
Exchange gain 1,000
(MXN500,000  [.075  .077])

(b)
Equity Diversity International Inc.
Balance Sheet
at December 31, Year 5
Assets
Inventory (500,000 x 0.077) 38,500

Liabilities
Accounts payable (MXN500,000) 37,500

Equity
Retained earnings (Exchange gain) 1,000

(c) (i)

December 1, Year 5
Inventory 38,500
Accounts Payable (MXN) 38,500
(MXN500,000  .077)
Recognize the purchase of the paintings

December 31, Year 5

Memorandum Entry
EDI entered into a forward contract to pay to the bank $39,500 (MXN500,000 X 0.079) in
exchange for MXN500,000 to be received from the bank on April 1, Year 6. Both the payable to
the customer and the receivable from the bank will offset each other.

December 31, Year 5

Revalue both the forward contract and the monetary liability. Any changes in value will be
recognized on the income statement
Accounts payable (MXN) 1,000
Exchange gain 1,000
(MXN500,000  [.075  .077])

Exchange loss 500

Forward contract 500
(MXN500,000  [.079-.078])

April 1, Year 6
Revalue both the forward contract and the monetary liability and settle the accounts payable

Accounts payable (MXN) 7,500

Exchange gain 7,500
(MXN500,000  [.060  .075])

Exchange loss 9,000

Forward contract 9,000
(MXN800,000  [.060-0.078])
Close out the forward contract and obtain MXN

Cash (MXN) MXN500,000  .060 30,000

Forward contract 9,500
Cash (MXN500,000  .079) 39,500
Accounts payable 30,000
Cash (MXN) 30,000
(MXN500,000  .060)

(ii)
Equity Diversity International Inc.
Balance Sheet
at December 31, Year 5
Assets
Inventory (500,000 x 0.077) 38,500

Liabilities
Accounts payable (MXN500,000) 37,500

Forward contract (MXN500,000 x [0.078-0.079])) 500

Equity
Retained earnings (Exchange gain) 500

Equity Diversity International Inc.

Income Statement
For the period ended December 31, Year 5
Other Income
Foreign exchange gain 500
Problem 10-5
(a) (i)

December 1, Year 5
Accounts receivable (FC) 560,800
Sales 560,800
(FC800,000  .701)
(Recognize the sale and the Accounts receivable)

December 3, Year 5
Memorandum Entry
Company entered into a forward contract to pay FC800,000 to the bank in exchange for
$592,800 (FC800,000  .741) to be received from the bank on April 1, Year 6. The payable to
the bank will offset the receivable from the customer.

(ii)
December 31, Year 5
Revalue the receivable and also the forward contract
Accounts receivable (FC) 28,800
Exchange gain 28,800
(FC800,000  [.737  .701])

Exchange loss 8,800

Forward contract 8,800
(FC800,000  [.752  .741])

(iii)
April 1, Year 6
Revalue both the forward contract and the accounts receivable and close the forward contract
after the receivable is collected.
Accounts receivable (FC) 52,000
Exchange gain 52,000
(FC800,000  [.802  .737])
Exchange loss 40,000
Forward contract 40,000
(FC800,000  [.802  .752])

Cash (FC) (FC800,000  .802) 641,600

Accounts receivable (FC) 641,600
(FC800,000  .802)

Cash (FC)(FC800,000 x .741) 592,800

Forward contract 48,800
Cash (FC) (FC800,000 x .802) 641,600

(b) (i)
December 1, Year 5
Accounts receivable (FC) 560,800
Sales 560,800
(FC800,000  .701)

December 3, Year 5
Memorandum Entry
Company entered into forward contract to pay FC800,000 to the bank in exchange for $592,800
(FC800,000  .741) to be received from the bank on April 1, Year 6. The payable to the bank
will offset the receivable from the customer.

(ii)
December 31, Year 5
Accounts receivable (FC) 28,800
Exchange gain 28,800
(FC800,000  [.737  .701])

Exchange loss 8,669

Forward contract 8,669
(FC800,000  [.752  .741] / 1.0053)
(iii)
Problem 10-6
Note: debits are without brackets and credits are with brackets.
(a) (b)
December 1, Year 5
Accounts receivable (FC) 560,800 560,800
Sales (560,800) (560,800)
(FC800,000  .701)

December 3, Year 5
Memorandum Entry
Company entered into a forward contract to pay FC800,000 to the bank in exchange for
$592,800 (FC800,000  .741) to be received from the bank on April 1, Year 6. The spot element
of the payable to the bank will offset the receivable from the customer. The forward element of
the payable to the bank (i.e. the premium on the forward contract) will be accounted for as
hedge revenue over the term of the forward contract.

December 31, Year 5

Revalue both the monetary asset and the forward contract
Accounts receivable (FC) 28,800 28,800
Exchange gain (28,800) (28,800)
(FC800,000  [.737  .701])

Exchange loss (spot; to offset exchange gain) 28,800 28,800

OCI - Exchange gain (forward: plug) (20,000) (20,000)
Forward contract (8,800) (8,800)
(FC800,000  [.752  .741])

OCI - Exchange gain (forward) (FC800,000 x (.741 - .701) x ¼) 8,000 8,000

Hedge revenue (8,000) (8,000)
Amortize gain from premium on forward contract over 4 months
April 1, Year 6
Accounts receivable (FC) 52,000 52,000
Exchange gain (52,000) (52,000)
(FC800,000  [.802  .737])

Exchange loss (spot: to offset exchange gain) 52,000 52,000

OCI - Exchange gain (forward: plug) (12,000) (12,000)
Forward contract (40,000) (40,000)
(FC800,000  [.802  .752])

OCI - Exchange gain (forward) (FC800,000 x (.741 - .701) x 3/4) 24,000 24,000
Hedge revenue (24,000) (24,000)
Amortize gain from premium on forward contract over the remaining 3 months

Cash (FC) 641,600 641,600

Accounts receivable (FC) (641,600) (641,600)
(FC800,000  .802)

Cash (FC800,000 x .741) 592,800 592,800

Forward contract 48,800 48,800
Cash (FC) (641,600) (641,600)

(c)
The journal entries are the same under the two methods.
Problem 10-7
(a)
October 15, Year 4
Inventory 340,300
Accounts payable (RON) 340,300
(RON820,000  .415)

Memorandum entry
Company entered into forward contract to receive RON820,000 from the bank in exchange for a
payment of $350,960 (RON 820,000  .428) to the bank on December 15, Year 4. The
receivable from the bank will offset the payable to the supplier.

December 1, Year 4
Accounts receivable (ARS) 677,800
Sales 677,800
(ARS2,520,000  .269)

Memorandum entry
Company entered into forward contract to pay ARS2,520,000 to the bank in exchange for
$619,920 (ARS2,520,000  .246) from the bank on January 31, Year 5. The payable to the
bank will offset the receivable from the customer.

December 15, Year 4

Accounts payable (RON) 6,560
Exchange gains and losses 6,560
(RON 820,000  [.407  .415])

Exchange gains and losses 17,220

Forward contract 17,220
(RON 820,000  [.407  .428])
Cash (RON) (RON 820,000  .407) 333,740
Forward contract 17,220
Cash 350,960

Accounts payable (RON) 333,740

Cash (RON) 333,740
(RON 820,000  .407)

December 31, Year 4

Exchange gains and losses 40,320
Accounts receivable (ARS) 40,320
(ARS2,520,000  [.253  .269])

Forward contract 10,080

Exchange gains and losses 10,080
(ARS2,520,000  [.242  .246])

(b)
Hull Manufacturing Corp.
Balance Sheet
as at December 31, Year 4

Assets
Accounts receivable 637,560
Forward contract 10,080

Problem 10-8

October 31, Year 1

Memorandum entry
Company entered into forward contract to receive MXN10,000,000 from the bank in exchange
for a payment of $750,000 (MXN10,000,000 x 0.075) to the bank on March 1, Year 2. The
receivable from the bank will offset the payable to the supplier.
December 31, Year 1
Forward contract 10,000
Other comprehensive income – cash flow hedge 10,000
(MXN10,000,000 × [0.076 – 0.075])
Value forward contract at fair value

March 1, Year 2
Forward contract 20,000
Other comprehensive income – cash flow hedge 20,000
(MXN10,000,000 × [0.078 – 0.076])
Value forward contract at fair value

Cash (MXN) (MXN10,000,000 × 0.078) 780,000

Forward contract 30,000
Cash 750,000

Inventory 780,000
Cash (TL) 780,000
(MXN10,000,000 × 0.078)

Other comprehensive income – cash flow hedge 30,000

Inventory 30,000
To clear accumulated other comprehensive income

(b)
Partial trial balance – December 31, Year 1 DR CR
Forward contract * $10,000
Other comprehensive income – cash flow hedge** 0 $10,000
$10,000 $10,000

* Forward contract is shown as a current asset

 ** Other comprehensive income is shown after net income on the statement of comprehensive
income. Accumulated other comprehensive income is shown as a separate component of
shareholders’ equity.

Problem 10-11
Note: debits are without brackets and credits are with brackets.

Memorandum Entries
Company signed a contract to sell merchandise for CHF470,000 for delivery on January 31,
Year 7. Company entered into forward contract to pay CHF470,000 to the bank in exchange for
$662,700 (CHF470,000  1.41) to be received from the bank on January 31, Year 7. The
payable to the bank will offset the receivable from the customer.

(a) (c)

October 1, Year 6 CF Hedge FV Hedge

December 31, Year 6

Exchange loss 9,400

Other comprehensive income 9,400
Forward contract (9,400) (9,400)
(CHF470,000  [1.43  1.41])

Commitment receivable 9,400

Exchange gain (9,400)
(CHF470,000  [1.43  1.41])

January 31, Year 7

Cash (CHF) 658,000 658,000
Sales (658,000) (658,000)
(CHF470,000  1.40)

Forward contract 14,100 14,100

 Other comprehensive income (14,100)
Exchange gain (14,100)
(CHF470,000 x [1.43 – 1.40])

Exchange loss 14,100

Commitment receivable (14,100)
(CHF470,000  [1.43  1.40])

Commitment receivable 4,700

Other comprehensive income 4,700
Sales (4,700) (4,700)
To clear other commitment receivable/other
comprehensive income to sales account

Cash 662,700 662,700

Forward contract (4,700) (4,700)
Cash (CHF) (658,000) (658,000)

(b) (d)
Trial balance, December 31, Year 6 CF Hedge FV Hedge

Commitment receivable 9,400 B/S

Forward contract liability (9,400) (9,400) B/S
Exchange gains & losses 0 0 I/S
Other comprehensive income 9,400 (B/S)

(e) Under the fair value hedge, a current asset and current liability of $9,400 are reported
whereas only a $9,400 current liability is reported under the cash flow hedge. Therefore, the
fair value hedge shows a slightly better liquidity position.

Problem 10-13
(a)
Dec 1
Inventory $10,000
 Accounts Payable 10,000
(FCU300 x 10000 x 1/300)

Dec 31
Exchange loss 345
Accounts Payable 345
(FCU300 x 10,000 x 1/290 - FCU300 x 10,000 x 1/300)
Revaluation of Accounts Payable at year end

April 1
Accounts payable 509
Exchange loss 509
(FCU300 x 10,000 x 1/290)- FCU300 x 10000 x 1/305)

Accounts payable 9,836

Cash 9,836
(FCU300 x 10,000 x 1/305)

(b) Hedge of a forward purchase contract because it was a contract of purchase

(c) According to IFRS 9 the hedge of an anticipated foreign currency transaction can be
accounted for either as a cash flow hedge or as a fair value hedge.

Problem 10-14
(a) (d)
December 1, Year 3
Inventory 462,202 462,202
Accounts payable (DM) (462,202) (462,202)
(DM613,000  0.754)

December 3, Year 3
Memorandum Entry
Company entered into forward contract to receive DM613,000 from the bank in exchange for a
payment of $486,722 (DM613,000 x 0.794) to the bank on April 1, Year 4. The receivable from
the bank will offset the payable to the supplier.

December 31, Year 3

Exchange loss 9,808 9,808
Accounts payable (DM) (9,808) (9,808)
(DM613,000  [0.770 - 0.754])

Forward contract (DM613,000  [0.799 - 0.794]) 3,065 3,065

Exchange gain (3,065)
Exchange gain (spot: offset exchange loss) (9,808)
OCI – exchange loss (forward: plug) 6,743

Hedge expense 6,130

OCI - Exchange loss (forward) (6,130)
Amortize loss from premium on forward contract over 4 months
(DM613,000 x (.794 - .754) x 1/4)

April 1, Year 4
Exchange loss 28,198 28,198
Accounts payable (DM) (28,198) (28,198)
(DM613,000  [0.816 - 0.770])

Forward contract (DM613,000  [0.816 - 0.799]) 10,421 10,421

Exchange gain (10,421)
Exchange gain (spot: offset exchange loss) (28,198)
OCI – exchange loss (forward: plug) 17,777

Hedge expense 18,390

OCI - Exchange loss (forward) (18,390)
Amortize loss from premium on forward contract over 4 months
(DM613,000 x (.794 - .754) x 3/4)
Cash (DM) 500,208*
Forward contract (13,486) (13,486)
Cash (486,722) (486,722)
*(DM613,000  0.816)

Accounts payable (DM613,000 x 0.816) 500,208 500,208

Cash (DM) (500,208) (500,208)

(b)
Hamilton Importing Corp.
Statement of Financial Position
at December 31, Year 3

Assets
Forward contract $3,065

Liabilities
Accounts payable $472,010

(c) (e)
Inventory 462,202 462,202
Exchange loss 24,520
Hedge expense 24,520
Cash (486,722) (486,722)

Problem 10-15
August 1, Year 3
Memorandum Entry
Company signed a contract to purchase machinery for HK$500,000 for delivery on October 1,
Year 3 and requiring payment on December 31, Year 3 (i.e. will pay HK$500,000).

August 2, Year 3
Memorandum Entry
Company entered into forward contract to receive HK$500,000 from the bank in exchange for a
payment of $82,500 (HK$500,000 x 0.165) to the bank on December 31, Year 3. The receivable
from the bank will offset the payable to the supplier.

(a) (b) (c)

October 1, Year 3
Machinery 82,000 82,000 82,000
Accounts payable (HK$) 82,000 82,000 82,000
(HK$500,000 x 0.164)

Forward contract 1,500 1,500 1,500

OCI 1,500
Exchange gains/losses 1,500 1,500
(HK$500,000 x [0.168 – 0.165])

Accumulated OCI 1,500

Machinery 1,500
(To transfer accumulated OCI to machinery)

Exchange gains/losses 1,500

Commitment liability 1,500
(Recognize change in value of notional accounts payable)
(HK$500,000 x [0.168 – 0.165])

Commitment liability 1,500

Machinery 1,500
(To transfer commitment liability to machinery)

December 31, Year 3

Forward contract 500 500 500
OCI 500
Exchange gains/losses 500 500
(HK$500,000 x [0.169 – 0.168])
Exchange gains/losses 2,500 2,500 2,500
Account payable 2,500 2,500 2,500
(HK$500,000 x [0.169 – 0.164])

OCI 500
Exchange gains/losses 500
Clear OCI to exchange gains/losses as reclassification adjustment

Cash (HK$) (HK$500,000 x 0.169) 84,500 84,500 84,500

Forward contract 2,000 2,000 2,000
Cash 82,500 82,500 82,500
(Settle forward contract with bank)

Accounts payable (HK$) 84,500 84,500 84,500

Cash (HK$) 84,500 84,500 84,500
(Pay supplier)

Summary journal entry

Machinery 80,500 80,500 82,000
Exchange gains/losses 2,000 2,000 500
Cash 82,500 82,500 82,500

(d)
The cash outflow of $82,500 is the same under all three scenarios and is equal to the amount
paid to the bank to get the HK$ to be paid to the supplier. The difference between the three
parts is based on how the exchange adjustment on the forward contract is allocated. In parts a)
and b), the full exchange adjustment prior to delivery is allocated to the machinery due to the
special rules under hedge accounting. In part c), all the exchange adjustments end up in
exchange gains/losses.