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Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
CHAPTER 7
FOREIGN CURRENCY TRANSACTIONS AND
HEDGING FOREIGN EXCHANGE RISK
Chapter Outline
I. In today’s global economy, a great many companies deal in currencies other than their
reporting currencies.
A. Merchandise may be imported or exported with prices stated in a foreign currency.
B. For reporting purposes, foreign currency balances must be stated in terms of the
company’s reporting currency by multiplying it by an exchange rate.
C. Accountants face two questions in restating foreign currency balances.
1. What is the appropriate exchange rate for restating foreign currency balances?
2. How are changes in the exchange rate accounted for?
D. Companies often engage in foreign currency hedging activities to avoid the adverse impact
of exchange rate changes.
E. Accountants must determine how to properly account for these hedging activities.
II. Foreign exchange rates are determined in the foreign exchange market under a variety of
different currency arrangements.
A. Exchange rates can be expressed in terms of the number of U.S. dollars to purchase one
foreign currency unit (direct quotes) or the number of foreign currency units that can be
obtained with one U.S. dollar (indirect quotes).
B. Foreign currency trades can be executed on a spot or forward basis.
1. The spot rate is the price at which a foreign currency can be purchased or sold today.
2. The forward rate is the price today at which foreign currency can be purchased or sold
sometime in the future.
3. Forward exchange contracts provide companies with the ability to “lock in” a price
today for purchasing or selling currency at a specific future date.
C. Foreign currency options provide the right but not the obligation to buy or sell foreign
currency in the future, and therefore are more flexible than forward contracts.
III. FASB Accounting Standards Codification Topic 830, Foreign Currency Matters (FASB ASC
830) prescribes accounting rules for foreign currency transactions.
A. Export sales denominated in foreign currency are reported in U.S. dollars at the spot
exchange rate at the date of the transaction. Subsequent changes in the exchange rate
until collection of the receivable are reflected through a restatement of the foreign currency
account receivable with an offsetting foreign exchange gain or loss reported in income.
This is known as a two-transaction perspective, accrual approach.
B. The two-transaction perspective, accrual approach also is used in accounting for foreign
currency payables. Receivables and payables denominated in foreign currency create an
exposure to foreign exchange risk; this is the risk that changes in the exchange rate over
time will result in a foreign exchange loss.
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Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-
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IV. FASB Accounting Standards Codification Topic 815, Derivatives and Hedging (FASB ASC
815) governs the accounting for derivative financial instruments and hedging activities
including the use of foreign currency forward contracts and foreign currency options.
A. The fundamental requirement is that all derivatives must be carried on the balance sheet at
their fair value. Derivatives are reported on the balance sheet as assets when they have a
positive fair value and as liabilities when they have a negative fair value.
B. U.S. GAAP provides guidance for hedges of the following sources of foreign exchange risk:
1. foreign currency denominated assets and liabilities.
2. unrecognized foreign currency firm commitments.
3. forecasted foreign denominated currency transactions.
4. net investments in foreign operations (covered in Chapter 10).
C. Companies prefer to account for hedges in such a way that the gain or loss from the hedge
is recognized in net income in the same period as the loss or gain on the risk being
hedged. This approach is known as hedge accounting. Hedge accounting for foreign
currency derivatives may be applied only if three conditions are satisfied:
1. the derivative is used to hedge either a cash flow exposure or fair value exposure to
foreign exchange risk,
2. the derivative is highly effective in offsetting changes in the cash flows or fair value
related to the hedged item, and
3. the derivative is properly documented as a hedge.
D. Hedge accounting is allowed for hedges of two different types of exposure: cash flow
exposure and fair value exposure. Hedges of (1) foreign currency denominated assets and
liabilities, (2) foreign currency firm commitments, and (3) forecasted foreign currency
transactions can be designated as cash flow hedges. Hedges of (1) and (2) also can be
designated as fair value hedges. Accounting procedures differ for the two types of hedges.
E. For cash flow hedges of foreign currency denominated assets and liabilities, at each
balance sheet date:
1. The hedged asset or liability is adjusted to fair value based on changes in the spot
exchange rate, and a foreign exchange gain or loss is recognized in net income.
2. The derivative hedging instrument is adjusted to fair value (resulting in an asset or
liability reported on the balance sheet), with the counterpart recognized as a change in
Accumulated Other Comprehensive Income (AOCI).
3. An amount equal to the foreign exchange gain or loss on the hedged asset or liability is
then transferred from AOCI to net income; the net effect is to offset any gain or loss on
the hedged asset or liability.
4. An additional amount is removed from AOCI and recognized in net income to reflect (a)
the current period’s amortization of the original discount or premium on the forward
contract (if a forward contract is the hedging instrument) or (b) the change in the time
value of the option (if an option is the hedging instrument).
F. For fair value hedges of foreign currency denominated assets and liabilities, at each
balance sheet date:
1. The hedged asset or liability is adjusted to fair value based on changes in the spot
exchange rate, and a foreign exchange gain or loss is recognized in net income.
2. The derivative hedging instrument is adjusted to fair value (resulting in an asset or
liability reported on the balance sheet), with the counterpart recognized as a gain or
loss in net income.
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G. Under fair value hedge accounting for hedges of foreign currency firm commitments:
1. the gain or loss on the hedging instrument is recognized currently in net income, and
2. the change in fair value of the firm commitment is also recognized currently in net
income.
This accounting treatment requires (1) measuring the fair value of the firm commitment, (2)
recognizing the change in fair value in net income, and (3) reporting the firm commitment
on the balance sheet as an asset or liability. A decision must be made whether to
measure the fair value of the firm commitment through reference to (a) changes in the spot
exchange rate or (b) changes in the forward rate.
H. Cash flow hedge accounting is allowed for hedges of forecasted foreign currency
transactions. For hedge accounting to apply, the forecasted transaction must be probable
(likely to occur). The accounting for a hedge of a forecasted transaction differs from the
accounting for a hedge of a foreign currency firm commitment in two ways:
1. Unlike the accounting for a firm commitment, there is no recognition of the forecasted
transaction or gains and losses on the forecasted transaction.
2. The hedging instrument (forward contract or option) is reported at fair value, but
because there is no gain or loss on the forecasted transaction to offset against,
changes in the fair value of the hedging instrument are not reported as gains and
losses in net income. Instead they are reported in other comprehensive income. On
the projected date of the forecasted transaction, the cumulative change in the fair value
of the hedging instrument is transferred from other comprehensive income (balance
sheet) to net income (income statement).
V. IFRS is very similar to U.S. GAAP with respect to the accounting for foreign currency
transactions and hedging of foreign exchange risk.
A. IAS 21 requires the use of a two-transaction perspective in accounting for foreign currency
transactions with unrealized foreign exchange gains and losses accrued in net income in
the period of exchange rate change.
B. IAS 39 allows hedge accounting for foreign currency hedges of recognized assets and
liabilities, firm commitments, and forecasted transactions when documentation
requirements and effectiveness tests are met. Hedges are designated as cash flow or fair
value hedges.
C. One difference between IFRS and U.S. GAAP relates to the type of financial instrument
that can be designated as a foreign currency cash flow hedge. Under U.S. GAAP, only
derivative financial instruments can be used as a cash flow hedge, whereas IFRS also
allows non-derivative financial instruments, such as foreign currency loans, to be
designated as hedging instruments in a foreign currency cash flow hedge.
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Answer to Discussion Question
Do we have a gain or what?

This case demonstrates the differing kinds of information provided through application of current
accounting rules for foreign currency transactions and derivative financial instruments.
The Ahnuld Corporation could have received $200,000 [$2.00 x 100,000 tchecks] from its export
sale to Tcheckia if it had required immediate payment. Instead, Ahnuld allows its customer six
months to pay. Given the future exchange rate of $1.70, Ahnuld would have received only
$170,000 if it had not entered into the forward contract. This would have resulted in a decrease in
cash inflow of $30,000. In accordance with current accounting standards, the decrease in the value
of the tcheck receivable is recognized as a foreign exchange loss of $30,000. This loss represents
the cost of extending credit to the foreign customer if the tcheck receivable is left unhedged.
However, rather than leaving the tcheck receivable unhedged, Ahnuld sells tchecks forward at a
price of $180,000. Because the future spot rate turns out to be only $1.70, the forward contract
provides a benefit, increasing the amount of cash received from the export sale by $10,000. In
accordance with current accounting standards, the change in the fair value of the forward contract
(from zero initially to $10,000 at maturity) is recognized as a gain on the forward contract of
$10,000. This gain reflects the cash flow benefit from having entered into the forward contract, and
is the appropriate basis for evaluating the performance of the foreign exchange risk manager.
(Students should be reminded that the forward contract will not always improve cash inflow. For
example, if the future spot rate were $1.85, the forward contract would result in $5,000 less cash
inflow than if the transaction were left unhedged.)
The net impact on income resulting from the fluctuation in the value of the tcheck is a loss of
$20,000. Clearly, Ahnuld forgoes $20,000 in cash inflow by allowing the customer time to pay for
the purchase, and the net loss reported in income correctly measures this. The $20,000 loss is
useful to management in assessing whether the sale to Tcheckia generated an adequate profit
margin, but it is not useful in assessing the performance of the foreign exchange risk manager. The
net loss must be decomposed into its component parts to fairly evaluate the risk manager’s
performance.
Gains and losses on forward contracts designated as fair value hedges of foreign currency assets
and liabilities are relevant measures for evaluating the performance of foreign exchange risk
managers. (The same is not true for cash flow hedges. For this type of hedge, performance should
be evaluated by considering the net gain or loss on the forward contract plus or minus the forward
contract premium or discount.)
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Answers to Questions
1. Under the two-transaction perspective, an export sale (import purchase) and the subsequent
collection (payment) of cash are treated as two separate transactions to be accounted for
separately. The idea is that management has made two decisions: (1) to make the export sale
(import purchase), and (2) to extend credit in foreign currency to the foreign customer (obtain
credit from the foreign supplier). The income effect from each of these decisions should be
reported separately.
2. Foreign currency receivables resulting from export sales are revalued at the end of accounting
periods using the current spot rate. An increase in the value of a receivable will be offset by
reporting a foreign exchange gain in net income, and a decrease will be offset by a foreign
exchange loss. Foreign exchange gains and losses are accrued even though they have not
yet been realized.
3. Foreign exchange gains and losses are created by two factors: having foreign currency
exposures (foreign currency receivables and payables) and changes in exchange rates.
Appreciation of the foreign currency will generate foreign exchange gains on receivables and
foreign exchange losses on payables. Depreciation of the foreign currency will generate
foreign exchange losses on receivables and foreign exchange gains on payables.
4. Hedging is the process of eliminating exposure to foreign exchange risk so as to avoid

potential losses from fluctuations in exchange rates. In addition to avoiding possible losses,
companies hedge foreign currency transactions and commitments to introduce an element of
certainty into the future cash flows resulting from foreign currency activities. Hedging involves
establishing a price today at which foreign currency can be sold or purchased at a future date.
5. A party to a foreign currency forward contract is obligated to deliver one currency in exchange
for another at a specified future date, whereas the owner of a foreign currency option can
choose whether to exercise the option and exchange one currency for another or not.
6. Hedges of foreign currency denominated assets and liabilities are not entered into until a
foreign currency transaction (import purchase or export sale) has taken place. Hedges of firm
commitments are made when a purchase order is placed or a sales order is received, before a
transaction has taken place. Hedges of forecasted transactions are made at the time a future
foreign currency purchase or sale can be anticipated, even before an order has been placed or
received.
7. Foreign currency options have an advantage over forward contracts in that the holder of the
option can choose not to exercise if the future spot rate turns out to be more advantageous.
Forward contracts, on the other hand, can lock a company into an unnecessary loss (or a
reduced gain). The disadvantage associated with foreign currency options is that a premium
must be paid up front even though the option might never be exercised.
8. An enterprise is required to recognize all derivative financial instruments as assets or liabilities

on the balance sheet and measure them at fair value.
9. The fair value of a foreign currency forward contract is determined by reference to changes in
the forward rate over the life of the contract, discounted to the present value. Three pieces of
information are needed to determine the fair value of a forward contract at any point in time
during its life: (a) the contracted forward rate when the forward contract is entered into, (b) the
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current forward rate for a contract that matures on the same date as the forward contract
entered into, and (c) a discount rate; typically, the company’s incremental borrowing rate.
The manner in which the fair value of a foreign currency option is determined depends on
whether the option is traded on an exchange or has been acquired in the over the counter
market. The fair value of an exchange-traded foreign currency option is its current market price
quoted on the exchange. For over the counter options, fair value can be determined by
obtaining a price quote from an option dealer (such as a bank). If dealer price quotes are
unavailable, the company can estimate the value of an option using the modified Black-
Scholes option pricing model. Regardless of who does the calculation, principles similar to
those in the Black-Scholes pricing model will be used in determining the value of the option.
10. Hedge accounting is defined as recognition of gains and losses on the hedging instrument in
the same period as the recognition of gains and losses on the underlying hedged asset or
liability (or firm commitment).
11. For hedge accounting to apply, the forecasted transaction must be probable (likely to occur),
the hedge must be highly effective in offsetting fluctuations in the cash flow associated with the
foreign currency risk, and the hedging relationship must be properly documented.
12. In both cases, (1) sales revenue (or the cost of the item purchased) is determined using the
spot rate at the date of sale (or purchase), and (2) the hedged asset or liability is adjusted to
fair value based on changes in the spot exchange rate with a foreign exchange gain or loss
recognized in net income.
For a cash flow hedge, the derivative hedging instrument is adjusted to fair value (resulting in
an asset or liability reported on the balance sheet), with the counterpart recognized as a
change in Accumulated Other Comprehensive Income (AOCI). An amount equal to the foreign
exchange gain or loss on the hedged asset or liability is then transferred from AOCI to net
income; the net effect is to offset any gain or loss on the hedged asset or liability. An additional
amount is removed from AOCI and recognized in net income to reflect (a) the current period’s
amortization of the original discount or premium on the forward contract (if a forward contract is
the hedging instrument) or (b) the change in the time value of the option (if an option is the
hedging instrument).
For a fair value hedge, the derivative hedging instrument is adjusted to fair value (resulting in
an asset or liability reported on the balance sheet), with the counterpart recognized as a gain
or loss in net income. The discount or premium on a forward contract is not allocated to net
income. The change in the time value of an option is not recognized in net income.
13. For a fair value hedge of a foreign currency asset or liability (1) sales revenue (cost of
purchases) is recognized at the spot rate at the date of sale (purchase) and (2) the hedged
asset or liability is adjusted to fair value based on changes in the spot exchange rate with a
foreign exchange gain or loss recognized in net income. The forward contract is adjusted to
fair value based on changes in the forward rate (resulting in an asset or liability reported on the
balance sheet), with the counterpart recognized as a gain or loss in net income. The foreign
exchange gain (loss) and the forward contract loss (gain) are likely to be of different amounts
resulting in a net gain or loss reported in net income.
For a fair value hedge of a firm commitment, there is no hedged asset or liability to account for.
The forward contract is adjusted to fair value based on changes in the forward rate (resulting in
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an asset or liability reported on the balance sheet), with a gain or loss recognized in net
income. The firm commitment is also adjusted to fair value based on changes in the forward
rate (resulting in a liability or asset reported on the balance sheet), and a gain or loss on firm
commitment is recognized in net income. The firm commitment gain (loss) offsets the forward
contract loss (gain) resulting in zero impact on net income. Sales revenue (cost of purchases)
is recognized at the spot rate at the date of sale (purchase). The firm commitment account is
closed as an adjustment to net income in the period in which the hedged item affects net
income.
14. For a cash flow hedge of a foreign currency asset or liability (1) sales revenue (cost of
purchases) is recognized at the spot rate at the date of sale (purchase) and (2) the hedged
asset or liability is adjusted to fair value based on changes in the spot exchange rate with a
foreign exchange gain or loss recognized in net income. The forward contract is adjusted to
fair value (resulting in an asset or liability reported on the balance sheet), with the counterpart
recognized as a change in Accumulated Other Comprehensive Income (AOCI). An amount
equal to the foreign exchange gain or loss on the hedged asset or liability is then transferred
from AOCI to net income; the net effect is to offset any gain or loss on the hedged asset or
liability. An additional amount is removed from AOCI and recognized in net income to reflect
the current period’s allocation of the discount or premium on the forward contract.
For a hedge of a forecasted transaction, the forward contract is adjusted to fair value (resulting
in an asset or liability reported on the balance sheet), with the counterpart recognized as a
change in Accumulated Other Comprehensive Income (AOCI). Because there is no foreign
currency asset or liability, there is no transfer from AOCI to net income to offset any gain or
loss on the asset or liability. The current period’s allocation of the forward contract discount or
premium is recognized in net income with the counterpart reflected in AOCI. Sales revenue
(cost of purchases) is recognized at the spot rate at the date of sale (purchase). The amount
accumulated in AOCI related to the hedge is closed as an adjustment to net income in the
period in which the forecasted transaction was anticipated to occur.
15. In accounting for a fair value hedge, the change in the fair value of the foreign currency option
is reported as a gain or loss in net income. In accounting for a cash flow hedge, the change in
the entire fair value of the option is first reported in other comprehensive income, and then the
change in the time value of the option is reported as an expense in net income.
16. The accounting for a foreign currency borrowing involves keeping track of two foreign currency
payables—the note payable and interest payable. As both the face value of the borrowing and
accrued interest represent foreign currency liabilities, both are exposed to foreign exchange
risk and can give rise to foreign currency gains and losses.
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Answers to Problems
1. C (Foreign exchange gain/loss on foreign currency transaction)
An import purchase causes a foreign currency payable to be carried on the

books. If the foreign currency depreciates, the dollar value of the foreign
currency payable decreases, yielding a foreign exchange gain.
2. D (Method of accounting for foreign currency transactions)
Current accounting standards require a two-transaction perspective, accrual

approach.
3. B (Foreign exchange gain/loss on foreign currency transaction)
Foreign exchange gains related to foreign currency import purchases are

treated as a component of income before income taxes. If there is no foreign
exchange gain in operating income, then the purchase must have been
denominated in U.S. dollars or there was no change in the value of the
foreign currency from October 1 to December 1, 2015.
4. C (Calculate foreign exchange gain/loss on foreign currency transaction)
The dollar value of the LCU receivable has decreased from $110,000 at
December 31, 2015 to $95,000 at February 15, 2016. This decrease of $15,000
should be reported as a foreign exchange loss in 2016.
5. D (Calculate foreign exchange gain/loss on foreign currency borrowing)
The increase in the dollar value of the euro note payable represents a foreign
exchange loss. In this case a $25,000 loss would have been accrued in 2015
and a $10,000 loss will be reported in 2016.
6. D (Foreign exchange gain/loss on foreign currency transaction)
A foreign currency receivable will generate a foreign exchange gain when the
foreign currency increases in dollar value. A foreign currency payable will
generate a foreign exchange gain when the foreign currency decreases in
dollar value. Hence, the correct combination is franc (increase) and peso
(decrease).
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7. D (Calculate foreign exchange gain/loss)
The merchandise purchase results in a foreign exchange loss of $8,000, the

difference between the U.S. dollar equivalent at the date of purchase and at
the date of settlement.
The increase in the dollar equivalent of the note’s principal results in a
foreign exchange loss of $20,000.
The total foreign exchange loss is $28,000 ($8,000 + $20,000).
8. D (Forward contract cash flow hedge of foreign currency denominated

asset/liability)
The Thai baht is selling at a premium (forward rate exceeds spot rate). The
exporter will receive more dollars as a result of selling the baht forward than
if the baht had been received and converted into dollars on April 1. Thus, the
premium results in additional revenue for the exporter.
9. D (Forward contract fair value hedge of foreign currency firm commitment)
The parts inventory will be recognized at the spot rate at the date of receipt
(FC100,000 x $.23 = $23,000).
10. D (Determine the fair value of a forward contract)
The forward contract must be reported on the December 31, 2015 balance
sheet as a liability. Barnum has locked-in to purchase ringgits at $0.042 per
ringgit but could have locked-in to purchase ringgits at $0.037 per ringgit if it
had waited until December 31 to enter into the forward contract. The forward
contract must be reported at its fair value discounted for two months at 12%,
which is $4,901.50 [($.042 – $.037) x 1,000,000 x .9803].
11. C (Calculate foreign exchange gain/loss on foreign currency transaction)
The 10 million won receivable has changed in dollar value from $35,000 at
12/1/15 to $33,000 at 12/31/15. The won receivable will be written down by
$2,000 and a foreign exchange loss will be reported in 2015 income.
12. B (Forward contract fair value hedge of foreign currency denominated

asset/liability)
The nominal value of the forward contract on December 31, 2015 is a positive
$2,000, the difference between the amount to be received from the forward
contract actually entered into, $34,000 ($.0034 x 10 million), and the amount
that could be received by entering into a forward contract on December 31,
12. (continued)
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2015 that matures on March 31, 2016, $32,000 [$.0032 x 10 million]. The fair
value of the forward contract is the present value of $2,000 discounted for
three months, which is $1,941.20 [$2,000 x .9706]. On December 31, 2015,
MNC Corp. will recognize a $1,941.20 gain on the forward contract and a
foreign exchange loss of $2,000 on the won receivable. The net impact on
2015 income is –$58.80.
13. A (Forward contract cash flow hedge of forecasted foreign currency

transaction)
The krona is selling at a premium in the forward market, causing Pimlico to

pay more dollars to acquire kroner than if the kroner were purchased at the
spot rate on March 1. Therefore, the premium results in an expense of
$10,000 [($.12 – $.10) x 500,000].
The Adjustment to Net Income is the amount accumulated in Accumulated
Other Comprehensive Income (AOCI) as a result of recognizing the Premium
Expense and the fair value of the forward contract. The journal entries would
be as follows:
3/1 no journal entries
6/1 Premium Expense $10,000

AOCI $10,000
AOCI $2,500
Forward Contract $2,500
Foreign Currency $57,500

Forward Contract 2,500
Cash $60,000
AOCI $7,500
Adjustment to Net Income $7,500
14. C (Option cash flow hedge of forecasted foreign currency transaction)
This is a cash flow hedge of a forecasted transaction. The original cost of the
option is recognized as an Option Expense over the life of the option.
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15-17. (Option fair value hedge of a foreign currency firm commitment)
15. B
16. D
The easiest way to solve problems 15 and 16 is to prepare journal entries for
the option fair value hedge and the firm commitment. The journal entries are
as follows:
9/1/15
Foreign Currency Option $2,000
Cash $2,000
12/31/15
Foreign Currency Option $300
Gain on Foreign Currency Option $300
Loss on Firm Commitment $980.30
Firm Commitment $980.30
[($.79 – $.80) x 100,000 = $1,000 x .9803 = $980.30]
Net impact on 2015 net income:
Gain on Foreign Currency Option $300.00
Loss on Firm Commitment (980.30)
$(680.30)
3/1/16
Loss on Firm Commitment $2,019.70

Firm Commitment $2,019.70
[($.77 – $.80) x 100,000 = $3,000 – $980.30 = $2,019.70]
Foreign Currency (C$) $77,000

Sales $77,000
Cash $80,000
Foreign Currency (C$) $77,000
Foreign Currency Option 3,000
Firm Commitment $3,000

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15-17. (continued)

Gain on Foreign Currency Option $ 700.00
Loss on Firm Commitment (2,019.70)
Sales 77,000.00
Adjustment to Net Income 3,000.00
$78,680.30
17. B Net cash inflow with option ($80,000 – $2,000) $78,000

Cash inflow without option (at spot rate of $.77) 77,000
Net increase in cash inflow $ 1,000
18-20. (Forward contract fair value hedge of a foreign currency firm commitment)
the forward contract fair value hedge of a firm commitment. The journal
entries are as follows:
3/1 no journal entries
3/31 Forward Contract $1,250

Gain on Forward Contract $1,250
($1,250 – $0)
Loss on Firm Commitment $1,250

Net impact on first quarter net income is $0.
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18-20. (continued)
4/30 Loss on Forward Contract $250

Forward Contract $250
[Fair value of Forward Contract is
(($.120 – $.118) x 500,000) = $1,000;
$1,000 – $1,250 = $250]
Firm Commitment $250
Gain on Firm Commitment $250
Foreign Currency (pesos) $59,000
Sales [500,000 pesos x $.118] $59,000
Cash [500,000 x $.120] $60,000
Foreign Currency (pesos) $59,000
Net impact on second quarter net income is: Sales $59,000 – Loss on Forward
Contract $250 + Gain on Firm Commitment $250 + Adjustment to Net Income
$1,000 = $60,000.
18. A
19. C
20. B Cash inflow with forward contract [500,000 pesos x $.12] $60,000
Cash inflow without forward contract [500,000 pesos x $.118] 59,000
Net increase in cash flow from forward contract $ 1,000
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21-22. (Option cash flow hedge of a forecasted foreign currency transaction)
the option cash flow hedge of a forecasted transaction. The journal entries
are as follows:
11/1/15
Cash $1,500
12/31/15
Option Expense $400
(The option has no intrinsic value at 12/31/15 so the entire change in fair
value is due to a change in time value; $1,500 – $1,100 = $400 decrease in
time value. The decrease in time value of the option is recognized as an
expense in net income.)
Option Expense decreases net income by $400.
2/1/16
Option Expense $1,100
Foreign Currency Option 900
Accumulated Other Comprehensive Income (AOCI) $2,000
(Record expense for the decrease in time value of the
option; $1,100 – $0 = $1,100; and write-up option to fair
value ($.40 – $.41) x 200,000 = $2,000 – $1,100 = $900.)
Foreign Currency (BRL) [200,000 x $.41] $82,000

Cash [200,000 x $.40] $80,000
Parts Inventory $82,000

Foreign Currency (BRL) $82,000
Accumulated Other Comprehensive Income (AOCI) $2,000

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21-22. (continued)

Option Expense $ (1,100)
Cost-of-Goods-Sold (82,000)
Adjustment to Net Income 2,000
Decrease in Net Income $ (81,100)
21. B
22. C
23. (10 minutes) (Foreign currency payable -- import purchase)
a. The decrease in the dollar value of the LCU payable from November 1 (60,000
x .345 = $20,700) to December 31 (60,000 x .333 = $19,980) is recorded as a
$720 foreign exchange gain in 2015.
b. The increase in the dollar value of the LCU payable from December 31
($19,980) to January 15 (60,000 x .359 = $21,540) is recorded as a $1,560
foreign exchange loss in 2016.
24. (10 minutes) (Foreign currency receivable – export sale)
a. The ostra receivable decreases in dollar value from (50,000 x $1.05) $52,500
at December 20 to $51,000 (50,000 x $1.02) at December 31, resulting in a
foreign exchange loss of $1,500 in 2015.
b. The further decrease in dollar value of the ostra receivable from $51,000 at
December 31 to $49,000 (50,000 x $.98) at January 10 results in an additional
$2,000 foreign exchange loss in 2016.
25. (10 minutes) (Foreign currency receivable – export sale)
9/15 Accounts Receivable (FCU) [100,000 x $.40] $40,000

Sales $40,000
9/30 Accounts Receivable (FCU) $2,000

Foreign Exchange Gain $2,000
[100,000 x ($.42 – $.40)]
10/15 Foreign Exchange Loss $5,000

Accounts Receivable (FCU)
[100,000 x ($.37 – $.42)] $5,000
Cash $37,000
Accounts Receivable (FCU) $37,000
26. (10 minutes) (Foreign currency payable -- import purchase)
7-15
Hill Education.
12/1/15 Inventory $52,800

Accounts Payable (LCU) [60,000 x $.88] $52,800
12/31/15 Accounts Payable (LCU) [60,000 x ($.82 – $.88)] $3,600

1/28/16 Foreign Exchange Loss $4,800

Accounts Payable (LCU) [60,000 x ($.90 – $.82)] $4,800
Accounts Payable (LCU) $54,000

Cash $54,000
27. (15 minutes) (Determine U.S. dollar balance for foreign currency transactions)
Inventory and Cost of Goods Sold are reported at the spot rate at the date the
inventory was purchased. Sales are reported at the spot rate at the date of sale.
Accounts Receivable and Accounts Payable are reported at the spot rate at the
balance sheet date. Cash is reported at the spot rate when collected and the
spot rate when paid.
a. Inventory [50,000 pesos x 40% x $.17] ..................................................... $3,400

b. COGS [50,000 pesos x 60% x $.17] .......................................................... $5,100
c. Sales [45,000 pesos x $.18]....................................................................... $8,100
d. Accounts Receivable [45,000 – 40,000 = 5,000 pesos x $.21] ................ $1,050
e. Accounts Payable [50,000 – 30,000 = 20,000 pesos x $.21] ................... $4,200
f. Cash [(40,000 x $.19) – (30,000 x $.20)] .................................................... $1,600
7-16
Hill Education.
28. (25 minutes) (Prepare journal entries for foreign currency transactions)
2/1/15 Equipment $17,600

Accounts Payable (L) [40,000 x $.44] $17,600
4/1/15 Accounts Payable (L) $17,600

Foreign Exchange Loss 400
Cash [40,000 x $.45] $18,000
6/1/15 Inventory $14,100

Accounts Payable (L) [30,000 x $.47] $14,100
8/1/15 Accounts Receivable (L) [40,000 x $.48] $19,200

Sales $19,200
Cost-of-Goods Sold $9,870

Inventory [$14,100 x 70%] $9,870
10/1/15 Cash [30,000 x $.49] $14,700

Accounts Receivable (L) [$19,200 x 3/4] $14,400
Foreign Exchange Gain 300
11/1/15 Accounts Payable (L) [$14,100 x 2/3] $9,400

Foreign Exchange Loss [20,000 x ($.50 – $.47)] 600
Cash [20,000 x $.50] $10,000
12/31/15 Foreign Exchange Loss $500

Accounts Payable (L) [10,000 x ($.52 – $.47)] $500
Accounts Receivable (L) [10,000 x ($.52 – $.48)] $400

Foreign Exchange Gain $400
2/1/16 Cash [10,000 x $.54] $5,400

Accounts Receivable (L) [10,000 x $.52] $5,200
Foreign Exchange Gain 200
3/1/16 Accounts Payable (L) [10,000 x $.52] $5,200

Foreign Exchange Loss 300
Cash [10,000 x $.55] $5,500
7-17
Hill Education.
29. (20 minutes) (Determine income effect of foreign currency payable – import
purchase)
a. Benjamin, Inc. has a liability of AL 160,000. On the date that this liability
was created (December 1, 2015), the liability had a dollar value of $70,400
(AL 160,000 x $.44). On December 31, 2015, the dollar value has risen to
$76,800 (AL 160,000 x $.48). The increase in the dollar value of the liability
creates a foreign exchange loss of $6,400 ($76,800 – $70,400) in 2015.
By March 1, 2016, when the liability is paid, the dollar value has dropped to
$72,000 (AL 160,000 x $.45) creating a foreign exchange gain of $4,800
($72,000 – $76,800) to be reported in 2016.
b. Benjamin, Inc. has a liability of AL 160,000. On the date that this liability
was created (September 1, 2015), the liability had a dollar value of $73,600
(AL 160,000 x $.46). On December 1, 2015, when the liability is paid, the
dollar value has decreased to $70,400 (AL 160,000 x $.44). The drop in the
dollar value of the liability creates a foreign exchange gain of $3,200
($70,400 – $73,600) in 2015.
c. Benjamin, Inc. has a liability of AL 160,000. On the date that this liability
was created (September 1, 2015), the liability had a dollar value of $73,600
(AL 160,000 x $.46). On December 31, 2015, the dollar value has risen to
$76,800 (AL 160,000 x $.48). The increase in the dollar value of the liability
creates a foreign exchange loss of $3,200 ($76,800 – $73,600) in 2015.
By March 1, 2016, when the liability is paid, the dollar value has dropped to
$72,000 (AL 160,000 x $.45) creating a foreign exchange gain of $4,800
($72,000 – $76,800) to be reported in 2016.
7-18
Hill Education.
30. (30 minutes) (Foreign currency borrowing)
a. 9/30/15 Cash $100,000

Note payable (dudek) [1,000,000 x $.10] $100,000
(To record the note and conversion of 1 million
dudeks into $ at the spot rate.)
12/31/15 Interest Expense $525

Interest Payable (dudek) $525
[1,000,000 x 2% x 3/12 = 5,000 dudeks x
$.105 spot rate]
(To accrue interest for the period 9/30 – 12/31/15.)
Foreign Exchange Loss $5,000

Note Payable (dudek) [1 m x ($.105 – $.10)] $5,000
(To revalue the note payable at the spot rate of
$.105 and record a foreign exchange loss.)
9/30/16 Interest Expense [15,000 dudeks x $.12] $1,800

Interest Payable (dudek) 525
Foreign Exchange Loss [5,000 dudeks x
($.12 – $.105)] 75
Cash [20,000 dudeks x $.12] $2,400
(To record the first annual interest payment,
record interest expense for the period 1/1 – 9/30/16,
and record a foreign exchange loss on the
interest payable accrued at 12/31/15.)
12/31/16 Interest Expense $625

Interest Payable (dudek) [5,000 dudeks x $.125] $625
(To accrue interest for the period 9/30 – 12/31/16.)
Foreign Exchange Loss $20,000

Note Payable (dudek) [1 m x ($.125 – $.105)] $20,000
(To revalue the note payable at the spot rate of
$.125 and record a foreign exchange loss.)
7-19
Hill Education.
30. (continued)
9/30/17 Interest Expense [15,000 dudeks x $.15] $2,250

Interest Payable (dudek) 625
Foreign Exchange Loss [5,000 dudeks x
($.15 – $.125)] 125
Cash [20,000 dudeks x $.15] $3,000
(To record the second annual interest payment,
record interest expense for the period 1/1 – 9/30/15,
and record a foreign exchange loss on the interest
payable accrued at 12/31/16.)
Note Payable (dudek) $125,000

Foreign Exchange Loss 25,000
Cash [1 m dudeks x $.15] $150,000
(To record payment of the 1 million dudek note.)
b. The effective cost of borrowing can be determined by considering the total

interest expense and foreign exchange losses related to the loan and comparing
this with the amount borrowed:
2015
Interest expense $525
Foreign exchange loss 5,000
Total $5,525 / $100,000 = 5.525% for 3 months
5.525% x 12/3 = 22.1% for 12 months
2016
Interest expense $2,425
Foreign exchange losses 20,075
Total $22,500 / $100,000 = 22.5% for 12 months
2017
Interest expense $2,250
Foreign exchange losses 25,125
Total $27,375 / $100,000 = 27.38% for 9 months
27.38% x 12/9 = 36.5% for 12 months
Because of appreciation in the value of the dudek, the effective annual

borrowing costs range from 22.1% – 36.5%.
7-20
Hill Education.
30. (continued)
The net cash flow from this borrowing is:
Cash outflows:
Interest ($2,400 + $3,000) $5,400
Principal 150,000
$155,400
Cash inflow:
Borrowing (100,000)
Net cash outflow $ 55,400
Ignoring compounding, this results in an effective borrowing cost of

approximately 27.7% per year [($55,400 / $100,000) = 55.4% over two years;
55.4% / 2 years = 27.7% per year].
7-21
Hill Education.
31. (40 minutes) (Forward contract hedge of foreign currency receivable)
a. Cash Flow Hedge
Date Journal Entry Debit Credit

12/1/15 Accounts Receivable (K) $ 43,200.00
Sales $ 43,200.00
To record sales and foreign currency account receivable.
No entry for the forward contract.

Foreign Exchange Gain $ 1,600.00
To revalue the foreign currency account receivable and recognize a
foreign exchange gain.
AOCI $ 1,960.60
Forward Contract $ 1,960.60
To record the change in fair value of the forward contract as a liability.
Loss on Forward Contract $ 1,600.00

AOCI $ 1,600.00
To record a loss on forward contract to offset the foreign exchange gain.
AOCI $ 400.00
Premium Revenue $ 400.00
To allocate the forward contract premium over the life of the contract.
Impact on 2015 income:

Sales $ 43,200
Foreign Exchange Gain 1,600
Loss on Forward Contract (1,600)
Premium Revenue 400
Total $ 43,600
7-22
Hill Education.
31. (continued)
a. Cash Flow Hedge (continued)

AOCI $ 839.40
Forward Contract $ 839.40
To adjust the carrying value of the forward conract to its current fair value.

AOCI $ 2,400.00
To record a loss on forward contract to offset the foreign exchange gain.
AOCI $ 800.00
Premium Revenue $ 800.00
Foreign Currency (K) $ 47,200.00

Accounts Receivable (K) $ 47,200.00
To record the receipt of korunas from the foreign customer.
Cash $ 44,400.00
To record settlement of the forward contract.

Foreign Exchange Gain $ 2,400
Premium Revenue 800
Total $ 800
Impact on net income over both periods: $ 44,400.00

which is equal to cash inflow.
7-23
Hill Education.
31. (continued)
b. Fair Value Hedge

Sales $ 43,200.00
To record sales and foreign currency account receivable.


To record the change in fair value of the forward contract as a liability
and recognize a loss on forward contract.

Sales $ 43,200.00
Foreign Exchange Gain 1,600.00
Loss on Forward Contract (1,960.60)
Total $ 42,839.40
7-24
Hill Education.
31. (continued)
b. Fair Value Hedge (continued)

Loss on Forward Contract $ 839.40

To adjust the carrying value of the forward conract to its current fair value
and recognize a loss on forward contract.

Accounts Receivable (K) $ 47,200.00
To record the receipt of korunas from the foreign customer.
Cash $ 44,400.00
Forward Contract 2,800.00

Loss on Forward Contract (839.40)
Total $ 1,560.60
Impact on net income over both periods: $ 44,400.00

which is equal to cash inflow.
7-25
Hill Education.
32. (40 minutes) (Forward contract hedge of foreign currency payable)
a. Cash Flow Hedge

12/1/15 Cost of Goods Sold $ 43,200.00
Accounts Payable (K) $ 43,200.00
To recognize the purchase of materials immediately as cost of goods sold
and record a foreign currency account payable.
12/31/15 Foreign Exchange Loss $ 1,600.00

To revalue the foreign currency account payable and recognize a
foreign exchange loss.

AOCI $ 1,960.60
To record the change in fair value of the forward contract as an asset.
AOCI $ 1,600.00
Gain on Forward Contract $ 1,600.00
To record a gain on forward contract to offset the foreign exchange loss.
Premium Expense $ 400.00

AOCI $ 400.00

Cost of Goods Sold $ (43,200)
Foreign Exchange Loss (1,600)
Gain on Forward Contract 1,600
Premium Expense (400)
Total $ (43,600)
7-26
Hill Education.
32. (continued)
a. Cash Flow Hedge (continued)


AOCI $ 839.40
To adjust the carrying value of the forward contract to its current fair value.
AOCI $ 2,400.00
To record a gain on forward contract to offset the foreign exchange loss.
Premium Expense $ 800.00

AOCI $ 800.00

Cash $ 44,400.00

To record the payment of korunas to the foreign supplier.

Foreign Exchange Loss $ (2,400)
Premium Expense (800)
Total $ (800)
Impact on net income over both periods: $ (44,400.00)

which is equal to cash outflow.
7-27
Hill Education.
32. (continued)
b. Fair Value Hedge

12/1/15 Cost of Goods Sold $ 43,200.00
To recognize the purchase of materials immediately as cost of goods sold
and record a foreign currency account payable.


To record the change in fair value of the forward contract as an asset
and recognize a gain on forward contract.

Cost of Goods Sold $ (43,200.00)
Foreign Exchange Loss (1,600.00)
Gain on Forward Contract 1,960.60
Total $ (42,839.40)
7-28
Hill Education.
32. (continued)
b. Fair Value Hedge (continued)


Gain on Forward Contract $ 839.40
To adjust the carrying value of the forward contract to its current fair value
and recognize a gain on forward contract.

To record the payment of korunas to the foreign supplier.

Cash $ 44,400.00

Foreign Exchange Loss $ (2,400.00)
Gain on Forward Contract 839.40
Total $ (1,560.60)
Impact on net income over both periods: $ (44,400.00)

which is equal to cash outflow.
7-29
Hill Education.
33. (30 minutes) (Option hedge of foreign currency receivable)
a. Cash Flow Hedge
6/1 Accounts Receivable (P) $62,000

Sales [$.062 x 1,000,000] $62,000

Cash $2,500

Foreign Exchange Gain
[($.066 – $.062) x 1,000,000] $4,000
AOCI $700
[($.0018 – $.0025) x 1,000,000]
Loss on Foreign Currency Option $4,000

AOCI $4,000
Option Expense $700

AOCI $700
Date Fair Value Intrinsic Value Time Value Change in Time Value
6/1 $2,500 $0 $2,500 –
6/30 $1,800 $0 $1,800 – $ 700
9/1 $1,000 $1,000 $0 – $1,800
7-30
Hill Education.
33. (continued)

Accounts Receivable (P) $5,000
[($.061 – $.066) x 1,000,000]
AOCI $800
[$1,800 – $1,000]
AOCI $5,000
Gain on Foreign Currency Option $5,000

AOCI $1,800
(Change in time value of option is recognized as expense)
Foreign Currency (P) $61,000

Cash $62,000
Impact on Net Income over the Two Accounting Periods:

Sales $62,000
Loss on Foreign Currency Option (4,000)
Gain on Foreign Currency Option 5,000
Foreign currency option expense (2,500)
Impact on net income $59,500 = Net cash inflow
7-31
Hill Education.
33. (continued)
b. Fair Value Hedge

Sales [$.062 x 1,000,000] $62,000

Cash $2,500

[($.066 – $.062) x 1,000,000]
Loss on Foreign Currency Option $700


[($.061 – $.066) x 1,000,000]


Cash $62,000
Impact on Net Income over the Two Accounting Periods:

Sales $62,000
Loss on Foreign Currency Option (1,500)
Impact on net income $59,500 = Net cash inflow
7-32
Hill Education.
34. (30 minutes) (Option hedge of foreign currency payable)
a. Cash Flow Hedge
6/1 Inventory [$.085 x 1,000,000] $85,000

Accounts Payable (M) $85,000

Cash $2,000

[($.088 – .085) x 1,000,000]

AOCI $2,000
[$4,000 – $2,000]
AOCI $3,000
Option Expense $1,000*

AOCI $1,000
Date Fair Value Intrinsic Value Time Value Change in Time Value
6/1 $2,000 $0 $2,000 -
6/30 $4,000 $3,000 $1,000 -$1,000*
9/1 $5,000 $5,000 $0 -$1,000**
7-33
Hill Education.
34. (continued)

[($.09 – $.088) x 1,000,000]

AOCI $1,000
[$5,000 – $4,000]
AOCI $2,000
Option Expense $1,000**

AOCI $1,000
Foreign Currency (M) $90,000

Cash $85,000

Impact on net income:

Option Expense ($2,000)
7-34
Hill Education.
34. (continued)
b. Fair Value Hedge
6/1 Inventory $85,000

[$.085 x 1,000,000]

Cash $2,000

[($.088 – $.085) x 1,000,000]

[$4,000 – $2,000]

[($.09 – $.088) x 1,000,000]

[$5,000 – $4,000]

Cash $85,000

Impact on net income:

Foreign Exchange Loss ($5,000)
Gain on Foreign Currency Option 3,000
Impact on net income ($2,000)
7-35
Hill Education.
35. (30 minutes) (Forward contract cash flow hedge of foreign currency
denominated asset)
Account Receivable (FCU) Forward Forward Contract

Spot U.S. Dollar Change in U.S. Rate to Change in
Date Rate Value Dollar Value 4/30/16 Fair Value Fair Value
11/01/15 $.53 $53,000 - $.52 $0 -
12/31/15 $.50 $50,000 -$3,000 $.48 $3,8441 +$3,844
4/30/16 $.49 $49,000 -$1,000 $.49 $3,0002 - $ 844
1
($52,000 – $48,000) x .961 = $3,844; where .961 is the present value factor for four
months at an annual interest rate of 12% (1% per month) calculated as 1/1.01 4.
2
$52,000 – $49,000 = $3,000.
2015 Journal Entries
11/01/15 Accounts Receivable (FCU) $53,000

Sales $53,000
There is no entry for the forward contract.

AOCI $3,000

AOCI $3,844
Discount expense $333.33

AOCI $333.33
[100,000 x ($.53 – $.52) x 2/6]
The impact on net income for the year 2015 is:

Sales $53,000.00
Foreign Exchange Loss (3,000.00)
Net Gain (Loss) 0.00
Discount Expense (333.33)
Impact on net income $52,666.67
7-36
Hill Education.
35. (continued)

AOCI $1,000
AOCI $844
Forward Contract $844
Discount expense $666.67

AOCI $666.67
Foreign Currency (FCU) $49,000

Cash $52,000
Foreign Currency (FCU) $49,000

Foreign Exchange Loss $(1,000.00)
Net Gain (Loss) 0.00
Discount Expense (666.67)
Impact on net income $(666.67)
7-37
Hill Education.
36. (30 minutes) (Forward contract fair value hedge of net foreign currency
denominated asset)
Account Receivable (Payable) (mongs) Forward Forward Contract

Change in U.S. Rate to Change in
Date U.S. Dollar Value Dollar Value 1/31/16 Fair Value Fair Value
11/30/15 $265,000 ($159,000) - $.52 $0 -
12/31/15 $250,000 ($150,000) -$15,000 (-$9,000) $.48 $7,9211 +$7,921
1/31/16 $245,000 ($147,000) -$ 5,000 (-$3,000) $.49 $6,0002 - $1,921
1
($104,000 – $96,000) x .9901 = $7,921; where .9901 is the present value factor for one
month at an annual interest rate of 12% (1% per month) calculated as 1/1.01.
2
$104,000 – $98,000 = $6,000.
11/30 Accounts Receivable (mongs) $265,000

Sales $265,000
[$.53 x 500,000]
Inventory $159,000
Accounts Payable $159,000
[$.53 x 300,000]
There is no formal entry for the forward contract.

Accounts Receivable (mongs) $15,000
Accounts Payable (mongs) $9,000



Sales $265,000
Net Foreign Exchange Loss $ (6,000)
Net Gain (Loss) 1,921
Impact on net income $266,921
7-38
Hill Education.
36. (continued)


Loss on Forward Contract $1,921

Foreign Currency (mongs) $245,000


Cash $104,000

Net Foreign Exchange Loss $(2,000)
Impact on net income $(3,921)
The net effect on the balance sheet is an increase in cash of $104,000 and an
increase in inventory of $159,000 with a corresponding increase in retained
earnings of $263,000 ($266,921 – $3,921).
7-39
Hill Education.
37. (40 minutes) (Forward contract fair value hedge – foreign currency receivable
and firm commitment (sale))
a. Foreign Currency Receivable
10/01 Accounts Receivable (LCU) $69,000

Sales $69,000
[100,000 x $.69]

[($.71 – $.69) x 100,000]
Loss on Forward Contract $8,910.90

Forward Contract $8,910.90
[($.74 – $.65) x 100,000 x .9901]

[($.72 – $.71) x 100,000]

[(($.72 – $.65) x 100,000) – 8,910.90]
Foreign Currency (LCU) $72,000

Accounts Receivable (LCU) $72,000
Cash $65,000
The impact on net income:

Sale $69,000.00
Foreign Exchange Gain 3,000.00
Loss on Forward Contract (8,910.90)
Impact on net income $65,000.00 = Cash Inflow
7-40
Hill Education.
37. (continued)
b. Foreign Currency Firm Commitment (Sale)
10/01 There is no entry to record either the sales agreement or the

forward contract as both are executory contracts.
12/31 Loss on Forward Contract $8,910.90


Gain on Firm Commitment $8,910.90
1/31 Forward Contract $1,910.90

Gain on Forward Contract $1,910.90


Sales $72,000
Cash $65,000

Impact on Net Income:

Sales $72,000
Net Loss on Forward Contract (7,000)
Net Gain on Firm Commitment 7,000
Adjustment to Net Income (7,000)
$65,000 = Cash Inflow
7-41
Hill Education.
38. (30 minutes) (Forward contract fair value hedge of a foreign currency firm
commitment (purchase))
Forward Forward Contract Firm Commitment

Rate to Change in Change in
Date 10/31 Fair Value Fair Value Fair Value Fair Value
8/1 $.30 $0 - $0 $0 -
9/30 $.325 $4,950.501 + $4,950.50 $(4,950.50)1 – $4,950.50
10/31 $.320 (spot) $4,0002 – $ 950.50 $(4,000)2 + $ 950.50
1
($65,000 – $60,000) x .9901 = $4,950.5; where .9901 is the present value factor for one
2
($64,000 – $60,000) = $4,000.
a. Journal entries
8/1 There is no entry to record either the purchase agreement or the
forward contract as both are executory contracts.
10/31 Loss on Forward Contract $950.50
Forward Contract $950.50
Firm Commitment $950.50
Gain on Firm Commitment $950.50
Foreign Currency (rupees) $64,000
Cash $60,000
Inventories (Cost-of-Goods-Sold) $64,000
Foreign Currency (rupees) $64,000
b. Assuming the inventory is sold in the fourth quarter, the net impact on net
income is negative $60,000:
Cost-of-Goods-Sold $(64,000)
Net impact on net income $(60,000)
c. The net cash outflow is $60,000.
39. (30 minutes) (Option fair value hedge of a foreign currency firm commitment
(sale))
7-42
Hill Education.
Firm Commitment Option Option

Spot Change in Premium Change in
Date Rate Fair Value Fair Value for 9/1 Fair Value Fair Value
6/1 $1.00 - - $0.020 $2,000 -
6/30 $0.94 $(5,881.80)1 – $5,881.80 $0.028 $2,800 + $800
9/1 $0.88 $(12,000)2 – $6,118.20 N/A $12,000 + $9,200
1
($94,000 – $100,000) x .9803 = $(5,881.80), where .9803 is the present value factor for
two months at an annual interest rate of 12% (1% per month) calculated as 1/1.01 2.
2
$88,000 – $100,000 = $(12,000).
a. Journal Entries
6/1 Foreign Currency Option $2,000.00

Cash $2,000.00
There is no entry to record the sales agreement

because it is an executory contract.
6/30 Loss on Firm Commitment $5,881.80

Foreign Currency Option $800.00

Gain on Foreign Currency Option $800.00
9/1 Loss on Firm Commitment $6,118.20

Foreign Currency Option $9,200.00

Gain on Foreign Currency Option $9,200.00
Foreign Currency (lek) $88,000.00

Sales $88,000.00
Cash $100,000.00
Foreign Currency (lek) $88,000.00
Foreign Currency Option 12,000.00

Adjustment to Net Income $12,000.00
39. (continued)
b. Impact on Net Income
7-43
Hill Education.
The impact on net income for the second quarter is:

Loss on Firm Commitment $(5,881.80)
Gain on Foreign Currency Option 800.00
Impact on net income $(5,081.80)
The impact on net income for the third quarter is:

Sales $88,000.00
Loss on Firm Commitment (6,118.20)
Gain on Foreign Currency option 9,200.00
Adjustment to Net Income 12,000.00
Impact on net income $103,081.80
The impact on net income over the second and third quarters is:
$98,000 ($103,081.80– $5,801.80)
c. Net Cash Inflow
The net cash inflow resulting from the sale is:

$98,000 ($100,000 – $2,000)
7-44
Hill Education.
40. (20 minutes) (Option fair value hedge of a foreign currency firm commitment
(purchase))
Firm Commitment Option Option

11/20 $.20 - - $.008 $400 -
a) 12/20 $.21 $(500)1 – $500 $.0103 $500 + $100
b) 12/20 $.18 $1,0002 + $1,000 $.0004 $0 – $400
1
$10,000 – $10,500 = $(500).
2
$10,000 – $9,000 = $1,000.
3
The premium on 12/20 for an option that expires on that date is equal to the option’s
intrinsic value. Given the spot rate on 12/20 of $.21, a call option with a strike price of $.20
has an intrinsic value of $.01 per pijio.
4
The premium on 12/20 for an option that expires on that date is equal to the option’s
intrinsic value. Given the spot rate on 12/20 of $.18, a call option with a strike price of $.20
has no intrinsic value – the premium on 12/20 is $.000.
a. The option strike price ($.20) is less than the spot rate ($.21) on December 20, the
date the parts are to be paid for. Therefore, Big Arber will exercise its option.
The journal entries are as follows:
11/20 Foreign Currency Option $400

Cash $400
There is no entry to record the purchase agreement
12/20 Loss on Firm Commitment $500

Foreign Currency (pijio) $10,500
Cash $10,000
Foreign Currency Option 500
Parts inventory $10,500
The following entry is made in the period when the inventory affects net
income through cost-of-goods-sold:

Adjustment to Net Income $500
7-45
Hill Education.
40. (continued)
b. The option strike price ($.20) is greater than the spot rate ($.18) on December 20,
the date the parts are to be paid for. Therefore, Big Arber will allow the option to
expire unexercised. Foreign currency will be acquired at the spot rate on
December 20. The journal entries are as follows:
11/20 Foreign Currency Option $400

Cash $400
There is no entry to record the purchase agreement

12/20 Firm Commitment $1,000

Gain on Firm Commitment $1,000
Cash $9,000
The following entry is made in the period when the inventory affects net
income through cost-of-goods-sold:

7-46
Hill Education.
41. (20 minutes) (Option cash flow hedge of a forecasted transaction)
a.
12/15/15 Foreign Currency Option $5,000

Cash [1 million marks x $.005] $5,000
No journal entry related to the forecasted

transaction.

AOCI $3,000
To recognize the increase in the value of
the foreign currency option with the counterpart
recorded in AOCI.

AOCI $1,000
To recognize the decrease in the time value
of the option as expense.
[($.584 – $.58) x 1,000,000 = $4,000 – $3,000 = $1,000]

AOCI $2,000
To recognize the increase in the value of the
Foreign Currency Option with the counterpart
recorded in AOCI.

AOCI $4,000
To recognize the decrease in the time value of
the option as expense.
Foreign Currency (marks) $590,000

Cash $580,000
To record exercise of the foreign currency
option at the strike price of $.58 and close
out the foreign currency option account.

Foreign Currency (marks) $590,000
To record the purchase of parts and payment
of 1 million marks to the supplier.
7-47
Hill Education.
41. (continued)
AOCI $10,000
To transfer the amount accumulated in AOCI
as an adjustment to net income in the period
in which the forecasted transaction occurs.
b. Impact on net income: 2015 – Option Expense $(1,000)
2016 – Cost-of-goods-sold $(590,000)

Option Expense (4,000)
$(584,000)
The impact on net income over the two periods is $(585,000).
c. Net cash outflow for parts: $585,000 = ($5,000 + $580,000)
42. (60 minutes) (Unhedged foreign currency transaction; forward contract and
option hedge of foreign currency liability; forward contract and option hedge of
foreign currency firm commitment (purchase))
Part a. Foreign Currency Liability (Unhedged)
9/15 Inventory $200,000

Accounts Payable (euro) $200,000


Foreign Currency (euro) $220,000

Cash $220,000

7-48
Hill Education.
42. (continued)
Part b. Forward Contract Fair Value Hedge of a Foreign Currency Liability
Accounts Payable (C) Forward Forward Contract

Spot U.S. Dollar Change in U.S. Rate to Change in
Date Rate Value Dollar Value 10/31 Fair Value Fair Value
9/15 $1.00 $200,000 - $1.06 $0 -
1
9/30 $1.05 $210,000 +$10,000 $1.09 $5,940.60 +$5,940.60
10/31 $1.10 $220,000 +$10,000 $1.10 $8,000.002 +$2,059.40
1
($218,000 – $212,000) x .9901 = $5,940.60; where .9901 is the present value factor for
one month at an annual interest rate of 12% (1% per month) calculated as 1/1.01.
2
$220,000 – $212,000 = $8,000.
9/15 Inventory $200,000






Cash $212,000

7-49
Hill Education.
42. (continued)
Part c. Forward Contract Fair Value Hedge of a Foreign Currency Firm

Commitment (Purchase)
9/15 There is no formal entry for the forward contract or the purchase order.





Cash $212,000
Inventory $220,000
The following entry is made in the period when the inventory affects net income
through cost-of-goods-sold:

7-50
Hill Education.
42. (continued)
Part d. Option Cash Flow Hedge of a Foreign Currency Liability
The following schedule summarizes the changes in the components of the fair
value of the euro call option with a strike price of $1.00 for October 31.
Change Change
Spot Option Fair in Fair Intrinsic Time in Time
Date Rate Premium Value Value Value Value Value
09/15 $1.00 $.035 $7,000 - $0 $7,0001 -
09/30 $1.05 $.070 $14,000 + $7,000 $10,0002 $4,0002 - $3,000
10/31 $1.10 $.100 $20,000 + $6,000 $20,000 $03 - $4,000
1 Because the strike price and spot rate are the same, the option has no intrinsic
value. Fair value is attributable solely to the time value of the option.
2 With a spot rate of $1.05 and a strike price of $1.00, the option has an intrinsic
value of $10,000. The remaining $4,000 of fair value is attributable to time value.
3 The time value of the option at maturity is zero.
9/15 Inventory $200,000


Cash $7,000


AOCI $7,000
AOCI $10,000

AOCI $3,000
7-51
Hill Education.
42. (continued)


AOCI $6,000
AOCI $10,000

AOCI $4,000

Cash $200,000

7-52
Hill Education.
42. (continued)
Part e. Option Fair Value Hedge of a Foreign Currency Firm Commitment

(Purchase)
Firm Commitment Option Foreign Currency Option

9/15 $1.00 $0 - $.035 $ 7,000 -
9/30 $1.05 $ (9,901) –$ 9,9011 $.070 $14,000 +$7,000
10/31 $1.10 $(20,000) –$10,099 $.100 $20,000 +$6,000
1
($200,000 – $210,000) x .9901 = $(9,901), where .9901 is the present value factor for one
9/15 Foreign Currency Option $7,000

Cash $7,000





Cash $200,000
Inventory $220,000
The following entry is made in the period when the inventory affects net income
through cost-of-goods-sold:

7-53
Hill Education.
Chapter 9 Develop Your Skills
Research Case—International Flavors and Fragrances
The responses to this assignment might change over time as the company
changes its use of foreign currency derivatives or changes the manner in which
it discloses its foreign currency hedging activities in the annual report. The
following responses are based on IFF’s 2012 annual report.
1. In 2012, IFF provided information in the annual report related to its

management of foreign exchange risk in the following locations:
a. Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
c. Note 14. Financial Instruments, under “derivatives.”
2. Note 14 indicates that IFF uses foreign currency forward contracts to reduce
exposure to cash flow volatility arising from foreign currency fluctuations
associated with intercompany loans, foreign currency receivables and
payables (hedges of foreign currency denominated assets and liabilities), and
anticipated purchases of raw materials used in operations (hedges of
forecasted transactions).
The company also uses forward contracts to hedge net investments in
foreign operations. (This topic is discussed in more detail in Chapter 10.)
3. Toward the end of Note 14, the company indicates that “the ineffective
portion of the above noted cash flow hedges and net investment hedges was
not material for the years ended December 31, 2012 and 2011.”
7-54
Hill Education.
Accounting Standards Case—Forecasted Transactions
Questions asked in the case are:

• Is management’s intent sufficient to assess that a forecasted transaction is
likely to occur?
• If not, what additional evidence must be considered?
Source of guidance: FASB ASC 815-20-55-24 Derivatives and Hedging; Hedging-

General; Implementation Guidance and Illustrations; Probability of a
Forecasted Transaction
ASC 815-20-55-24 states: “An assessment of the likelihood that a forecasted

transaction will take place should not be based solely on management's intent
because intent is not verifiable. The transaction's probability should be supported
by observable facts and the attendant circumstances. Consideration should be
given to all of the following circumstances in assessing the likelihood that a
transaction will occur.
a. The frequency of similar past transactions
b. The financial and operational ability of the entity to carry out the transaction
c. Substantial commitments of resources to a particular activity (for example, a

manufacturing facility that can be used in the short run only to process a
particular type of commodity)
d. The extent of loss or disruption of operations that could result if the

transaction does not occur
e. The likelihood that transactions with substantially different characteristics

might be used to achieve the same business purpose (for example, an entity
that intends to raise cash may have several ways of doing so, ranging from a
short-term bank loan to a common stock offering).”
The answers to the specific questions asked in the case are:

• Management’s intent is not sufficient to assess whether a forecasted
transaction is likely to occur.
• Additional evidence listed in items a.-e. in ASC 815-20-55-24 must be
considered in assessing that likelihood.
7-55
Hill Education.
Excel Case—Determine Foreign Exchange Gains and Losses
Note to Instructors: At the time this case is assigned to students, please verify that
www.x-rates.com still reports the exchange rates used in the solution below.
These exchange rates were obtained from www.x-rates.com in January 2013.
For unexplained reasons, in the past, www.x-rates.com has made changes
over time to the historical exchange rates that it reports.
1., 2. and 3. Spreadsheet for the calculation of the foreign exchange gains (losses)
related to Import/Export Company’s foreign currency transactions for
the year 2012.
Exchange Exchange Foreign

Amount in Trans- Rate at $ Value on Rate at $ Value on Exchange
Foreign Type of Foreign action Transaction Transaction Settle- Settlement Settlement Gain
Currency Transaction Currency Date Date Date ment Date Date Date (Loss)
Brazilian
real Import
(BRL) purchase (100,000) 1/10/2012 0.553189 (55,318.90) 5/10/2012 0.511316 (51,131.60) $4,187.30
Chilean
peso Import
(CLP) purchase (27,000,000) 1/10/2012 0.001968 (53,136.00) 5/10/2012 0.002056 (55,512.00) (2,376.00)
Swiss
franc
(CHF) Export sale 50,000 1/10/2012 1.05384 52,692.00 4/10/2012 1.087158 54,357.90 1,665.90
Swiss
franc Import
(CHF) purchase (50,000) 4/10/2012 1.087158 (54,357.90) 7/10/2012 1.020427 (51,021.35) 3,336.55
Euro Export sale 40,000 1/10/2012 1.278102 51,124.08 4/10/2012 1.306505 52,260.20 1,136.12
Euro Export sale 40,000 4/10/2012 1.306505 52,260.20 7/10/2012 1.225452 49,018.08 (3,242.12)
Chinese
yuan Import
(CNY) purchase (340,000) 1/10/2012 0.158353 (53,840.02) 10/10/2012 0.158893 (54,023.62) (183.60)
Total Net
Foreign
Exchange
Gain
(Loss) $4,524.15
Source of exchange rates: www.x-rates.com, Historical Lookup
Import/Export Company reported a net foreign exchange gain of $4,524.15 in 2012

income.
Possible discussion points for instructors: Note that all transactions had a $
value on transaction date of approximately $53,000. The size of the foreign
exchange gains and losses reported in the last column differs substantially
across transactions because of different rates and directions of change in the
exchange rates across the currencies in which Import/Export Company had
exposures.
At one extreme, the large depreciation in value of the BRL from 1/10/12 to 5/10/12
coupled with the BRL liability exposure generated a large foreign exchange gain.
7-56
Hill Education.
Excel Case (continued)

On the other hand, the large appreciation in the value of the CLP over the same
time period resulted in a foreign exchange loss on a foreign currency payable.
An appreciation in the Euro from 1/10/12 to 4/10/12 coupled with the Euro asset
exposure resulting from the export sale on 1/10/12 generated a foreign exchange
gain. The subsequent depreciation in value of the Euro from 4/10/12 to 7/10/12
coupled with an asset exposure resulting from the export sale on 4/10/12 created
a large foreign exchange loss.
Analysis Case—Cash Flow Hedge
1. Given the $6,000 total Premium Expense, the forward rate on 2/1/15 must
have been $1.06 [($1.06 – $1.00 spot) x 100,000 euros = $6,000].
2. Given that the forward contract is reported as a liability of $1,980 ($2,000 x
.9901), the forward rate at 3/31/15 must have been $1.04 [($1.04 – $1.06) x
100,000 euros = $2,000]. The fact that the forward contract is a liability
signals that the forward rate at 3/31 is less than the forward rate on 2/1.
3. Given that the cost of goods sold is $103,000, the spot rate on 5/1/15 must
have been $1.03. Linber must pay $1.06 per euro under the forward contract,
so the forward contract results in an economic loss of $3,000 [($1.06 – $1.03)
x 100,000 euros]. The negative adjustment to net income reflects this
economic loss.
4. The Premium Expense of $6,000 reflects the increase in cost for the parts
from the date the transaction was forecasted until the date of purchase. If
Linber had purchased 100,000 euros on 2/1/15 at the spot rate of $1.00, it
could have saved $6,000.
7-57
Hill Education.
Internet Case—Historical Exchange Rates
Note to Instructors: At the time this case is assigned to students, please verify that
www.x-rates.com still reports the exchange rates used in the solution below.
These exchange rates were obtained from www.x-rates.com in January 2013.
For unexplained reasons, in the past, www.x-rates.com has made changes
over time to the historical exchange rates that it reports.
1. Spreadsheets for the calculation of the foreign exchange gains (losses)

related to Pier Ten Company’s foreign currency account receivables.
Foreign
Currency Exchange U.S. Dollar
Account Rate on Value on
Currency Code Receivable 10/15/12 10/15/12
Indian rupee INR 1,062,000 0.018851 $ 20,019.76
Philippine peso PHP 830,000 0.024108 20,009.64
Japanese yen JPY 1,578,000 0.012687 20,020.09
Malaysian ringgit MYR 61,200 0.32704 20,014.85

$ 80,064.34
Foreign Foreign
Currency Exchange U.S. Dollar Exchange
Account Rate on Value on Gain (Loss)
Currency Code Receivable 10/31/12 10/31/12 on 10/31/12
Indian rupee INR 1,062,000 0.018586 $ 19,738.33 $ (281.43)
Philippine peso PHP 830,000 0.024307 20,174.81 165.17
Japanese yen JPY 1,578,000 0.012512 19,743.94 (276.15)
Malaysian ringgit MYR 61,200 0.328216 20,086.82 71.97

$ 79,743.90 $ (320.44)
7-58
Hill Education.
Internet Case (continued)
Foreign Foreign
Currency Exchange U.S. Dollar Exchange
Account Rate on Value on Gain (Loss)
Currency Code Receivable 11/15/12 11/15/12 on 11/15/12
Indian rupee INR 1,062,000 0.018265 $ 19,397.43 $ (340.90)
Philippine peso PHP 830,000 0.024279 20,151.57 (23.24)
Japanese yen JPY 1,578,000 0.012319 19,439.38 (304.55)
Malaysian ringgit MYR 61,200 0.326531 19,983.70 (103.12)

$ 78,972.08 $ (771.82)
Foreign
Currency U.S. Dollar U.S. Dollar Net Foreign
Account Value on Value on Exchange
Currency Code Receivable 10/15/12 11/15/12 Gain (Loss)
Indian rupee INR 1,062,000 $ 20,019.76 $ 19,397.43 $ (622.33)
Philippine peso PHP 830,000 20,009.64 20,151.57 141.93
Japanese yen JPY 1,578,000 20,020.09 19,439.38 (580.70)
Malaysian ringgit MYR 61,200 20,014.85 19,983.70 (31.15)

$ 80,064.34 $ 78,972.08 $ (1,092.26)
Source of exchange rates: www.x-rates.com, Historical Lookup
2. Pier Ten would have reported a net foreign exchange loss of $320.44 in the
fiscal year ended October 31, 2012 and a net foreign exchange loss of $771.82
in the fiscal year ended October 31, 2013 related to these foreign currency
receivables. The transactions denominated in Indian rupees, Japanese yen,
and Malaysian ringgits resulted in foreign exchange losses of $622.33,
$580.70, and $31.15, respectively. The INR receivable, which generated the
largest loss, would have been the most important to hedge.
3. Assuming a strike price equal to the October 15, 2012 spot rate, the only
foreign currency transactions for which the purchase of a put option costing
$100 would have been beneficial are the transactions in Indian rupees and
Japanese yen. Net cash inflow from the INR receivable would have been
$522.33 greater ($622.33 FX loss avoided less $100.00 cost of the option) if a
Internet Case (continued)
7-59
Hill Education.
put option in INR had been acquired, and the net cash flow from the JPY
receivable would have been $480.70 greater ($580.70 FX loss avoided less
$100.00 cost of the option) if a put option in JPY had been acquired.
Because the strike price is greater than the spot rate on 11/15/12, the put
option in MYR would be exercised, but it would result in a decrease in net
cash flow of $68.85 ($31.15 loss avoided less $100.00 cost of the option).
Because the strike price is less than the spot rate on 11/15/12 the put option
in PHP would be allowed to expire unexercised. The purchase of the PHP
option would result in a decrease in net cash inflow to Pier Ten of $100.00
(the cost of the option).
7-60
Hill Education.
Communication Case—Forward Contracts and Options
To: Mr. Dewey Nukem, CEO, Palmetto Bug Extermination Company (PBEC)
The primary advantage of using forward contracts to hedge foreign exchange

risk is that there is no cost to enter into them. The disadvantage is that the
company is obligated to exchange foreign currency for dollars at the contracted
forward rate. Depending upon the future spot rate, this may or may not be
advantageous for the company. In contrast, the primary disadvantage of using
foreign currency options to hedge foreign exchange risk is that there is an up-
front cost incurred to purchase them. The primary advantage is that the
company is not required to exchange foreign currency for dollars at the option
strike price if it is disadvantageous to do so. The company can simply allow the
option to expire unexercised and the only cost is the initial premium that was
paid to acquire the option.
Exporters sometimes use forward contracts to hedge export sales (import

purchases) when the foreign currency is selling at a forward premium (discount)
as this locks in premium revenue (discount revenue). The risk associated with
this strategy is that the customer may or may not pay on time. If an exporter
enters into a forward contract to sell foreign currency, and the customer does
not pay on time, the exporter will need to purchase foreign currency at the spot
rate to settle the forward contract. This is essentially the same as speculation; a
gain or loss could arise. In this case, the exporter might be better off by
purchasing a foreign currency put option. The exporter can simply allow the
option to exercise if it has not received foreign currency from the customer by
the expiration date.
Since PBEC is making import purchases, it has more control over the timing of
when it will need foreign currency. In that case, it should be safe to enter into a
forward contract to purchase foreign currency on the date when PBEC plans to
pay for its purchases. However, there is always the risk that the supplier does
not deliver on time, in which case the forward contract provides PBEC with
foreign currency for which it has no current use.
The bottom line is that there is no right or wrong answer to the question which
hedging instrument should be used to hedge the Swiss franc exposure to
foreign exchange risk. Both forward contracts and option have the advantages
and disadvantages.
7-61
Hill Education.
Another random document with
no related content on Scribd:
The Project Gutenberg eBook of Gem of neatness
This ebook is for the use of anyone anywhere in the United States and most other parts of the world at
no cost and with almost no restrictions whatsoever. You may copy it, give it away or re-use it under the
terms of the Project Gutenberg License included with this ebook or online at www.gutenberg.org. If you
are not located in the United States, you will have to check the laws of the country where you are
located before using this eBook.
Title: Gem of neatness

Or, the cousins
Author: Madeline Leslie
Release date: December 2, 2023 [eBook #72280]
Language: English
Original publication: Boston: Andrew F. Graves, 1872
*** START OF THE PROJECT GUTENBERG EBOOK GEM OF NEATNESS ***

Transcriber's note: Unusual and inconsistent spelling is as printed.
SPARKLING GEMS
BY MRS. MADELINE LESLIE.
Gem of Neatness:
OR,
THE COUSINS.
BY
MRS. MADELINE LESLIE

"Let all things be done decently and in order."—I COR 14:40.
BOSTON:
ANDREW F. GRAVES.
20 CORNHILL.
Entered, according to Act of Congress, in the year 1872,

BY A. R. BAKER, D.D.
In the Office of the Librarian of Congress at Washington.
J. D. Flagg & Co.

51 Walter and 57 Congress Sta.
Boston.
LIST
OF
SPARKLING GEMS
FOR YOUTH.
SERIES FOR GIRLS.
VOL. I. GEM OF COURTESY.
VOL. II. GEM OF COURAGE.
VOL. III. GEM OF FAITHFULNESS.
VOL. IV. GEM OF NEATNESS.
VOL. V. GEM OF TRUTHFULNESS.
VOL. VI. GEM OF EARNESTNESS.

LIST
OF
SPARKLING GEMS
FOR YOUTH.
SERIES FOR BOYS.
VOL. I. GEM OF UPRIGHTNESS.
VOL. II. GEM OF SELF-DENIAL.
VOL. III. GEM OF PERSEVERANCE.
VOL. IV. GEM OF TEMPERANCE.
VOL. V. GEM OF SELF-CONTROL.
VOL. VI. GEM OF GENEROSITY.
DEDICATION.
MY DEAR LITTLE HARRY:
I HAVE DEDICATED THESE SMALL VOLUMES TO YOU,

PRAYING THAT THE GEMS OF WHICH THEY TREAT, MAY
ADORN YOUR CROWN IN THE CORONATION DAY OF CHRIST'S
BELOVED.
Your affectionate grandmother,
THE AUTHOR.
PREFACE.
THE author of these volumes recently attended the commencement of a seminary, in which
sparkling crowns were placed on the heads of such of the graduates as had been
distinguished for diligence, faithfulness, neatness and other virtues. Being very much
pleased with the design, I have appropriated the idea in these small volumes.
On the illuminated title page, the teacher and pupils appear. He holds up to their view a
sparkling gem, just taken from his cabinet. We may imagine him explaining to them, that
these precious stones are used in the Bible as emblems of the different graces which adorn
the character of Christians, even as God says: these graces "shall be as the stones of a
crown," put upon their heads.
CONTENTS.
CHAPTER I. EMILY'S BUREAU
CHAPTER II. OLD FRIENDS
CHAPTER III. MILLY'S ARRIVAL
CHAPTER IV. MILLY AT PRAYERS
CHAPTER V. MILLY AT TABLE
CHAPTER VI. MILLY'S REQUEST
CHAPTER VII. GRANDMA'S ARRIVAL
CHAPTER VIII. THE MISSIONARIES
CHAPTER IX. ORDER FROM CONFUSION
CHAPTER X. MILLY'S CHAMBER
CHAPTER XI. A DRIVE TO THE BEACH
CHAPTER XII. MILLY'S ESCAPE
GEM OF NEATNESS.
CHAPTER I.
EMILY'S BUREAU.
MRS. MORGAN stood at the door of her little daughter's chamber, a bright smile of
satisfaction illumining her countenance. Presently she stepped back into the hall, and,
leaning over the balustrade, called out:
"Cousin Mary, come up here a moment."
A light step on the stairs, and cousin Mary stood by her side.
"This is Emily's room," said her mamma—"just as she left it for school. Everything has a
place, and is in its place."
Mrs. Roby, who was cousin Mary, entered the neat chamber, her eyes beaming with
pleasure.
"It looks just like Emily," she said in an enthusiastic tone.
"See! That book-rack,—How very even the row of volumes, and not one speck of dust on
them;—and this tiny vase, with one carnation-pink! Priscilla, your daughter is a jewel of a
girl as our old Pat used to say. Her habit of neatness and order will be worth a fortune to
her."
"She is naturally neat and orderly," added Mrs. Morgan. "When she was not more than
three years old, she used to want to help when I dusted the parlors. I always take that
duty on myself, you know. So Emily must have an old veil tied over her golden curls,
because mamma wore a veil to keep off the dust; and she must have a piece of silk for a
duster. It was too funny to see her fly from one chair to another, just as soon as I had
dusted it, and rub, rub, with all her strength."
"Does she take the entire care of her room?"
"Yes, now she does," answered mamma. "Hannah used to open the bed, and turn the
mattress; but she was so anxious to do it all; and sometimes she had to wait for Hannah
to get through with other work, so her father had the mattress carried to the upholsterer's,
and cut in two parts. She can lift it now without any difficulty."
While Mrs. Morgan was speaking, her cousin had gone toward the bureau, and with her
hands on the knobs of the upper drawer asked:
"May I look?"
"Certainly."
It was, indeed, a beautiful sight. A box in one of the front corners contained a pile of
pocket handkerchiefs. Another at the left was filled with ribbons of various colors used for
her hair and her neck. Each piece was rolled up nicely and laid by itself. Then there was a
tiny box, holding a pretty brooch,—her last birthday gift from papa. A black silk apron and
two or three white ones neatly folded lay at the back part of the drawer.
The next two contained different kinds of under clothes, each variety in a pile by itself.
"She puts everything away herself," explained her mamma. "Hannah lays her clean clothes
on the bed, as they come up from the wash; and when she comes home she takes care of
them without being reminded to do so. But look here?"
The lady opened the underdrawer, and displayed a beautiful wax doll covered with a small
quilt pieced from tiny scraps of bright-colored silk. Miss Rose Standish lay with a sweet
smile on her round face; and well she might smile, for there within her reach at the back
part of the drawer was every thing in the shape of a wardrobe which the most extravagant
dolly could desire. There was a set of white furs, muff and tippet to match; and another
set of gray with the cunningest little wristers you ever saw. There were hats with plumes,
and hats with velvet trimmings, and sacks, and skirts, and shoes and parasol to shade the
little Miss from the sun. Oh, it would be easier to tell what there was not!
"It's a perfect show," exclaimed Mrs. Roby. "It's as good as Barnum's baby show. I wonder
what aunt Lydia will say to it."
"The best of it is," added mamma, "that she has made the most of the clothes herself. I
used to cut and baste for her; but of late, she has had a pattern and cut them herself. Her
father says he hopes she will play with dolls till she is married. He is enthusiastic on the
subject. Why, you'd laugh to hear him talk. He believes that, the dressing and undressing
of dolls, and disciplining them, as Emily does hers, is the very best preparation for the
duties of a mother that a child can possibly have. He would give Emily any amount of
money she would ask to buy materials to make up for Miss Rose. By and by, I must tell
you a story about that gray set of furs."
"Tell me now, please. I'm sure," added Mrs. Roby laughing, "if I had ever disbelieved in
hereditary traits, I would give up my doubts after this."
"What do you mean?"
"Why from the stories I've heard Aunt Lydia tell about you, I think Emily is just her
mamma over again."
"Yes, I used to be ridiculously fond of dolls, there is no denying it; but in those days, a wax
doll was a thing unknown. My best doll was a beauty though. She had eyes that shone like
diamonds, and painted curls. I used to call her Esther, after Queen Esther, I suppose; and I
was very proud of her."
CHAPTER II.
OLD FRIENDS.
MRS. MORGAN shut the bureau as she spoke, saying with a smile: "Emily will know in a
minute, that somebody has been to her drawers."
"I had better confess beforehand then. Are you going to sew now?"
"Yes, I'll be ready presently."
Ina few moments, Mrs. Morgan joined her cousin in the pleasant sitting-room. But before I
tell you what they talked about, I wish to explain who these two ladies were.
Mrs. Morgan was the wife of a gentleman of good fortune connected with the great Express
lines from north to south. They were both members of the Episcopal Church; and it was
their earnest prayer that they might be not professors only, but possessors of vital
godliness. During the first years of their married life, they went much into company,
attended balls and concerts night after night. By this means, they lost much of the fervor
of their religion.
Indeed, so conformed were they to the world and its pleasures, that they could scarcely be
distinguished from the world's people. But their Father in heaven was watching over them.
He saw into their hearts, and he knew that even while involved in this round of gayety,
they were not satisfied. He knew there were times when they turned with loathing from all
this hollow friendship, and longed for the quiet happiness they once enjoyed. God in his
abounding kindness had a purpose of mercy toward these his wandering children; and he
took means to bring them back to himself.
He removed first a beautiful babe who had scarcely opened its eyes in this world, to his
paradise above. Then, when this did not wean the mother from circles of fashion, from the
theatre and opera, he took another child, a darling boy, the pride of both parents, to swell
the song of infant worshippers before his throne. A few months later, and while their
hearts were still bleeding with sorrow, Emily their first-born and best-beloved was seized
with scarlet-fever, and lay for days hovering between life and death.
Now, when the waves and the billows of trouble were rolling over them, they began to call
upon God for help. But to their aching hearts, he did not seem a refuge near at hand. He
appeared to be afar off, so far that their cry could not reach him. But if not to their
heavenly Father, to whom could they go in their deep distress? Then they began to feel
that they had sinned.
In their days of prosperity, they had forgotten to give thanks. They mourned together over
the sinfulness which had led them far away from real happiness; and then in infinite
compassion, their elder brother, their Saviour appeared to comfort them. The gracious
spirit suggested words of cheer: "Return unto me, and I will return unto you."
By the bedside of their sick and apparently dying child, they renewedly consecrated
themselves and all that they had, to the service of their Saviour. They bowed in sweet
submission to the will of God. They cried indeed "Spare her, Lord," but from the heart they
added, "if such be thy holy will."
And a merciful God did spare the child. She was gradually restored to perfect health. From
this time her parents commenced a new life. They were constant at church. They took
classes in the Sunday school. They visited the poor and afflicted. They did all in their
power to stay up the hands of their faithful pastor.
All the energy and activity they had before displayed in the invention of new pleasures
were now employed for the good of those about them. They were indeed a blessing in
society; and in blessing others, they received a rich reward in their own hearts. One glance
into the serene countenance of Mrs. Morgan showed that her soul was at peace.
Sickness and sorrow might come as it comes to every one; but she felt that all events for
her were ordered by a Father's hand. Emily was their one treasure, spared to them from
the grave. Is it strange that she was taught from her earliest recollection that her chief aim
in life should be to love and serve her Maker and Preserver?
Mrs. Roby, own cousin to Mrs. Morgan, had married young, and gone with her husband to
the West. He had been successful in business, and had now come East for a few months,
his wife improving the occasion long desired, to revive her acquaintance with those so dear
to her. She had only arrived the day before; and every moment that her cousin was at
liberty was improved in asking questions about herself and other friends.
Aunt Lydia was Mrs. Morgan's mother who usually passed a part of every year with her,
greatly to the delight of Emily.
CHAPTER III.
MILLY'S ARRIVAL.
THERE is another member of Mr. Morgan's family not yet introduced. Her real name is
Amelia Lewis; but everybody seems to have forgotten it; and she now answers to the
names Milly, or Mill. She is an orphan niece of Mr. Morgan, the child of his favorite sister,
who went to India with her husband, and died there shortly after Amelia's birth.
For seven years, her father kept the child with him in Calcutta; and then she was sent
home to his mother, where she remained until the old lady's increasing infirmities made
the care a burden.
Mr. Morgan, hearing at last of Milly's destitute situation, consulted with his wife as to what
was best to be done with the little girl. He proposed a boarding-school, and offered to be
answerable for all expenses; but Mrs. Morgan, with great feeling, exclaimed:
"No, George, never to a boarding-school with my consent. What she needs is a home,
where she can be loved and taught her duty."
"But we know nothing about her habits, and I cannot have our sweet Emily exposed to
influences which may corrupt her pure mind."
"Listen a moment, George. Somebody certainly owes a duty to the poor orphan. If it is
ours, we will undertake it, trusting in God to preserve our child from harm. We have
endeavored to teach her to love her Saviour, and to pray to him to shield her from
temptation. Now we must have faith to believe he will answer prayer."
"But, Priscilla, think how Milly has been brought up. You know what life in India is, from
poor Ida's letters. And without a mother, the child has been tossed about from one native
servant to another. I really can't see the way clear; and then think what a care for you!"
"Give me twenty-four hours to reflect," said the lady, cheerfully. "I will tell you then
whether I will undertake it."
The next evening, a letter was written inviting Milly to make her uncle a visit; he
volunteering a promise to pay her expenses for a year, either at his own house or at a
suitable school. A week later, Milly arrived, in company with a neighbor of her
grandmother, and quite a sensation did her debut create.
Milly was now in her tenth year, eight months younger than Emily. She had eyes that
shone like stars; and a complexion dark as an Indian. Her form was slender, and her
movements graceful. Her limbs were so supple that she could throw herself into any
attitude and did so to the alarm of her aunt, who feared every moment that she would
dislocate some bone.
It would be difficult to conceive a greater contrast than existed between the cousins. Emily
was of fair complexion, with deep blue eyes and auburn hair. In her person and dress, she
was the picture of neatness, while from her birth her parents had carefully guarded her
from every breath of harm.
Milly, on her arrival from a day's journey in the cars, looked like a wild girl. Her face was
covered with dust; her hair which floated loosely over her shoulders, looked as though
unacquainted with a brush; her hands were grimy with dirt; her nails even had a deep
border of black; her dress was buttoned awry; her boots were only half laced; and the
strings hung dangling around her ancles, threatening every moment to trip her up.
When the child had carelessly bid the neighbor who accompanied her to the door good-by,
without a word of thanks, and then, no ways abashed, stood in the centre of the room
gazing curiously at her new found relatives, Mrs. Morgan cast a despairing glance from her
husband to Emily.
The little girl, in the meantime, was trying hard to convince herself that this poor,
neglected creature was the dear cousin, for whose arrival she had been so impatient. She
blushed crimson as she noticed the slovenly hair and soiled dress; all desire to have Milly
share her room and bed vanishing on the instant. She could not endure the thought of a
kiss from a mouth with teeth so entirely a stranger to the brush.
But Milly did not notice the neglect. Alter one long, searching gaze into the faces of her
relatives, she threw her hat into a chair, tossed back with a quick jerk of her head the
locks fallen over her face; then with a loud yawn, exclaimed:
"I say, isn't it hot? I'm awfully hungry, too."
This appeal changed Emily's aversion to sympathy. She stepped forward eagerly, and
seizing her cousin's hand, said:
"Come with me to your room and wash. Supper will be ready in a few minutes."
She led the way to a small chamber on the opposite side of the hall from her own, saying
as she did so, "I'll help you to dress for tea."
"Oh dear!" exclaimed Mrs. Morgan, throwing up her hands when the children were out of
hearing, "Isn't she a real Hindoo? Can she ever be civilized?"
Mr. Morgan sighed repeatedly. "Oh, Ida!" he murmured, "How your child reminds me of
you! So like, yet so different; impulsive and careless, but with a warm heart!"
They were interrupted by a loud, prolonged laugh from the chamber; and in a few minutes
the cousins came down stairs hand in hand, just as the bell in the hall called them to
supper.
CHAPTER IV.
MILLY AT PRAYERS.
IT was evident that Emily had attempted to improve her cousin's appearance. Her face and
hands were clean; and one lock of hair next her face had been brushed smoothly, and tied
back with a cherry ribbon, from Emily's drawer. An apron and collar had been added from
the same place.
At the door of the dining-room, Milly snatched her hand from her cousin, and dashed up to
her aunt, asking, in a loud voice, "Say, doesn't I look smart? May I keep this red ribbon for
my own?"
At the table, while her uncle said grace, Milly folded her hands to be sure; but her eyes
wandered from one dish to another. She did not wait till the plate of biscuit was passed,
but snatched one, and commenced eating it, biting a huge piece off the side as a dog
would have done.
Emily blushed. "Wasn't it dreadful?" she asked mamma afterward.
"Did you have no dinner, Milly?" inquired her uncle, greatly annoyed.
"I had a paper bag full of doughnuts and cheese," answered the child, talking with her
mouth full, and showing all the process of masticating her food, occasionally using her
tongue to disengage the bread from her teeth. "Martha made them on purpose. You know
old Martha, don't you?"
Mr. Morgan gravely bowed assent. Every moment he was becoming more convinced that
Milly must be sent away to school.
When Mrs. Morgan passed the visitor a glass dish of currant jelly, she smacked her lips,
and glancing in her aunt's face with a smile, she burst out:
"I say, isn't this red stuff jolly good?"
"I'm glad you like it, my dear," was the kind reply.
Mr. Morgan pushed back his plate, saying in rather a petulant tone, "My appetite has
gone."
"Oh, papa!" said Emily, "You've only eaten one biscuit."
When the tea had been removed, Emily carried the Bible and hymn books to her father,
taking the opportunity, as she leaned over his shoulder, to whisper to him:
"I love you dearly, papa."
He glanced in her anxious face, nodded pleasantly, and then named the hymn they would
sing.
The exercises which followed appeared to interest Milly intensely. She listened to the
reading with open mouth, her keen gaze being fastened on her uncle till he closed the
Bible.
During the singing, her expression softened, till the tears stood in her eyes. But after the
first verse, she hummed an accompaniment, entirely ignoring the words, her voice, as
they all acknowledged afterward, being as sweet and clear as a nightingale in his native
woods.
When they rose from their seats to kneel, Milly squatted awkwardly down in front of her
chair, her chin resting on her hands. Her eyes were at first fixed on a beautiful painting of
fruit which hung above her; but presently her attention was arrested by the petitions:
"Help us, Lord, to be kind to the poor orphan who has this day come to us. May she be
docile and affectionate; and may we be patient and faithful. May we always bear in mind
that she has not been so highly favored by Providence as we have been, and may we, both
by precept and example, teach her that the ways of wisdom are ways of pleasantness, and
all her paths are peace."
When the prayer was finished, Milly stood still for a moment, while Emily, as usual,
gathered the books and restored them to a shelf in the bookcase. Then, with a sudden
impulse, the poor little stranger dashed to the side of her uncle, exclaiming:
"I like you. I thought at first I shouldn't; and I like to hear you talk to God as you did just
now."
"Stop a minute, Milly," cried her uncle, as she was darting away. "I want to speak to you.
Do you know," he added affectionately, taking her hand, "that your mother was my sister
Ida, whom I dearly loved? For her sake, and for your own, too, I hope we shall do
everything in our power to make you a useful and happy woman. But tell me, Milly, do you
ever talk to God? Do you ask him to take care of you, and make you his child?"
"I did once, on board ship," returned Milly. "A man told me God made everything on sea
and land; but I don't believe he made Juggernaut. It's such a horrid creature, and kills so
many people under its great wheels."
Before Mr. Morgan could say any more, the child darted away.
CHAPTER V.
MILLY AT TABLE.
IT was not an easy task for Mrs. Morgan to tame this wild creature; but when her husband
said, hopelessly:
"It will take years, Priscilla; and in the meantime Emily will be ruined."
She answered, in a cheerful voice:
"God has given us the work, George, I would not dare to refuse it."
There were many times every day that she was ready to despair. Milly had not one idea of
neatness and order, and could not be made to comprehend that it was of any consequence
to put her clothes, books and toys in place. Her hat as often was tossed on a chair in the
hall, her sack on the doorstep as on the hook and shelves allotted to them. In her room
were a bureau and closet. Her aunt showed her Emily's clothes, hung or folded so neatly;
but when she asked kindly:
"Won't you try, Milly, to keep yours in place?" the only answer was the laughing one:
"I can't bother with things. Let the servants do it."
"My poor child," said the lady tenderly, "it would be much easier for me to send Hannah to
dress your bed, and make your room tidy, than to teach you to do it. But can't you
understand that I do it for your good?"
"If you do not learn to be neat now, while you are young, you never will be likely to learn
at all. If you have a house of your own, you will not be able to find anything. You
remember what an inconvenience it is every day not to find your hat, your gloves, your
jumping-rope, your hoop-stick; and how much time it takes to hunt for them, when, if you
had a place for every thing, and kept every thing in its place if not in use, you would—"
"Oh!" interrupted Milly, "I say, what's the use of learning so many things, when, as soon as
I'm grown, I'm going back to India to live with father. There are plenty of servants in the
bungalows, and if I did the work, they would have nothing to do, but chew betel nuts,
which makes them lazy."
"But, Milly, you know the Bible is God's word. God, our heavenly Father, who loves us and
preserves us from harm, tells us—"
"Yes, I know about him. The man on board ship told me that he is not cruel and hateful
like the gods the Hindoos worship. I like him first-rate."
"Well, my dear, our God tells us what we must do in order to get into heaven when we die.
I'm sure you want to please him and go there."
Milly nodded her head in a decided manner.
"One of his rules is this: 'Let every thing be done decently and is order;' and a writer has
told us—'Order is heaven's first law.'"
"If we don't obey the law of God, we displease him."
"But he won't tell anybody to throw us to the crocodiles. The man told me that, or else I
shouldn't like him. The man says he forgives everybody."
"He does, every man, woman and child, who pray for forgiveness; but not those who go on
breaking his laws. That would be only mocking him."
"Oh! There's Emily, home from school."
And before Mrs. Morgan could put out her hand to detain the child, she had darted away.
Two weeks passed. To Mrs. Morgan, it did seem as though there was a slight improvement
in the habits of the motherless girl. Her looks and dress were decidedly better. Her hair
had been shortened, and showed a disposition to curl. She was required to brush it
carefully several times in a day. Her face, hands and neck, were examined thoroughly by
her aunt before she was allowed to leave her room in the morning, and her cousin's
influence had made her more thoughtful concerning her dress.
Since the first evening of her arrival, she had never eaten at the table with her uncle,
though. Unless they had company, she took her dinners with her aunt and cousins, Mr.
Morgan being absent in the city. She had taken daily lessons, and not without some effect,
in the handling of her knife and fork, keeping her elbows off the table, keeping her lips
closed while eating, waiting until the food was passed her by a servant, asking when she
wished anything, instead of making a dive at it. When she had cured herself of these
uncouth habits, and learned to eat like a lady, instead of like a dog, she had been
promised the reward of going to the table with her uncle.
At first, Milly said she'd rather not eat with him; it would be a great deal jollier to sit down
with Hannah and Phebe in the kitchen. She wished she could go there; but when day after
day she was sent from the room, and heard outside the pleasant talk, and the merry peals
of laughter from Emily, she changed her mind, and really tried to do as her aunt wished.
CHAPTER VI.
MILLY'S REQUEST.
WE have left Mrs. Morgan and her cousin a long time, and must now return to them.
When they were seated at their sewing, Mrs. Roby said: "I have been wishing to ask you
about Milly. What a very strange child she is! It is a perfect fascination to watch her."
"Yes, one never knows what she will do next. She has always been governed by her own
impulses, good or bad. I am glad to say many of them are good. She is capable of the
warmest attachments. I never knew until lately, how much she loves Emily. The poor child
fell a short distance from home, as they were going together of an errand, and sprained
her ancle. Milly actually tried to lift her cousin and bring her home; but finding she had not
strength, she rushed back in her furious way, crying as though her heart was broken, to
tell me Emily was hurt. Then, when Emily fainted, I thought Milly would faint too, she was
so terrified for fear her cousin would die. I had to take her up stairs, and leave her with
Hannah for a time. When I had bathed and bandaged Emily's ancle, I went to Milly, who
was sobbing bitterly."
"'Oh, Aunt Priscilla, I wish it had been my ancle! Emily's so good and kind. Oh, dear! I'm
so sorry I've vexed her so many times, I never, never will again. I'll let her things alone.
Will she get well, aunty? Will she? Oh, I'd rather go back to India! Things are always
happening here to make me ache,' putting both hands to her heart."
"I improved the opportunity while her feelings were tender, to talk with her about herself. I
told her we were all growing to love her very dearly; and that, when she tried to be good
and polite and tidy, it made Emily and all of us very happy."
"She fixed her keen, black eyes on me as she asked:"
"'Truly, truly, Aunt Priscilla, are you beginning not to be tired of me and thinking me a
bother, with my things thrown all about?'"
"Truly, truly, I am beginning to like to have you here, and to be able to say, Milly is
improving every week."
She covered her face with her hands, and laughed till she shook all over, when suddenly
she spoke again.
"'But I never can be like Emily; never in this world.'"
"Why not, Milly?"
"'Because she is a real Christian. When I struck her once, she did not get angry. She
said:'"
"'Oh, Cousin Milly!' And then she went in her own room, and locked the door. I listened at
the keyhole, for I heard her talking; and I thought she was telling you of my badness. But,
oh dear!—beginning to sob again, 'she was telling God that I was a poor, motherless girl,
and that the Hindoo ayah's hadn't taught me any better; and then she asked God to
forgive me. Isn't that being real, truly good?'"
"It is indeed, my dear child; and then I kissed her. But here they come."
Mrs. Morgan smiled as she glanced through the window. The cousins walked side by side,
engaged in animated conversation, Emily at the time being the chief speaker. Milly's hat
was, as usual, hanging by the elastic on the back of her neck; and her hair was in wild
confusion.
"You will see," said mamma softly, "that Emily will coax her cousin to the chamber, and
make her presentable, before she comes to the parlor."
And so it was, but they had business in hand, and Milly never was patient under delay.
They came down stairs together, talking in subdued tones, when the ladies heard Milly say:
"Uncle George has come home; and I'm going to ask him now."
"Oh, would you, so quick? He's always tired at first."
"Yes, I am," in Milly's decided voice, "I hate waiting for things."
So into the library Milly went, while Emily sat on the stairs in the hall, waiting and blushing
with eagerness.
Mr. Morgan had just entered the library. Seeing his niece with nicely brushed hair, and
clean muslin apron, he smiled so pleasantly, that she plunged into her subject at once.
"Oh, Uncle George! I want to talk to you a few minutes."
"I'm quite at your service, Miss Milly," he answered, throwing himself upon the lounge, as
was his habit after his walk, "but where is Emily?"
"She's somewhere; but Uncle George, would it cost a great deal of money to go to the
shore? Emily and I want to go awfully. It's a secret and you must be sure not to tell Aunt
Priscilla."
"Indeed, why is she to be kept in the dark?"
"Won't you tell truly, truly, if I whisper something?"
"No, I promise to keep your secret."

"Oh, Uncle George! I want to talk to you a few minutes."
She put her mouth close to his ear, "Emily says Aunty's birthday is coming pretty soon,
and she says I'm not so bad as I was, and I'm trying hard to be good. See how smooth my
hair is and my clean apron on. I like her ever so much now; and I put my things in the
drawers. I mean, I do when I don't forget; and then Emily reminds me. So I want to make
Aunt Priscilla a present; and I know how to do mosses, the woman on board ship showed
me; and that's the reason we want to go to the shore."
Milly stopped to recover breath, and then went on, eager to explain:
"Aunt Priscilla can go with us, of course; because Emily and I can pick the moss while she
isn't seeing us, and then I can do them at home for her birthday."
Mr. Morgan smiled pleasantly.
"There, I knew you would. I'll go and call Emily. She said I might ask you, 'cause it's going
to be my present."
"When do you wish to go, Miss Milly?"
The child laughed merrily; and then in her impulsive way began to kiss him, eyes, nose
and mouth. "When your eye twinkles, I love you dearly, Uncle George."
"There, Milly, you looked just like your mother when you said that; and so for her sake,
and because of your smooth hair, and your clean apron, and your attempts to be neat, I
will take you to-morrow afternoon, if it is pleasant."
Milly jumped a foot from the floor, laughing and clapping her hands, in great glee. Then,
she ran out to communicate the good news to her Cousin Emily.
CHAPTER VII.
GRANDMA'S ARRIVAL.
UNFORTUNATELY, the next day was rainy. And the following, Mrs. Morgan's mother arrived,
and they could not leave her.
Milly's patience was nearly exhausted when the second disappointment came. She knew
nothing about this grandma, and could not sympathize with Emily's joy at seeing her once
more. Grandmother Morgan was very feeble and often irritable. Milly had never become
attached to one who was always lamenting that Ida's child should be exactly like a Hindoo
girl, and finding fault with her for not doing things that the poor, neglected Milly had never
heard of.
Grandma Harris was fatigued with her journey, and lay down for an hour keeping hold of
Emily's soft hand all the time, even when she fell into a short doze. But she came from her
chamber quite refreshed, and gave a willing consent that Milly should come and hear the
story she had promised to tell.
Everybody said, Grandma Harris was a great story-teller. It was certain that when she was
at her daughter's, she had a great many stories to tell. She had heard all about the
motherless child, and heartily approved of Priscilla's intention to befriend her. Now, when
Emily urged that her cousin should be invited to join them and listen to the story, the old
lady smilingly consented.
Milly never in all her after life forgot that interview. Grandma was sitting in her favorite
chair, a deep seated maroon-covered one without arms; a narrow fold of delicate gauze
framing her beautiful silvery hair. Her dress was black silk, the rich, heavy folds lying on
the carpet by her side, the waist open and turned back at the neck to show the snowy
muslin kerchief folded across her bosom.
At first, Milly saw nothing of all this, except as a part of the beautiful picture. She only saw
the kind eyes, and the welcoming smile.
"You must be my granddaughter too, my dear, and give me a kiss," she said, taking the
child's hand and patting it softly. "Say, will you be my little girl as Emily is?"
Milly's face expressed great emotion. It was a very tell-tale face. Now it looked pleased
and penitent, and astonished by turns. At last, trying to wink back a tear which the loving
words brought to her eyes, she answered softly:
"I'm not good enough. Emily can tell you what a bad girl I am; and when everybody is so
kind, too."
"Indeed, Emily has told me nothing of the kind. She says you're her own darling cousin,—
that she loves you dearly,—and that you are trying so hard to be good."
"Yes, I do try sometimes. I mean, when I think of it. But I'm not nice and clean like Emily.
Aunty has a great deal of trouble with me, though my bed looks real smooth to-day, and
all my clothes are hung up."
"That is very cheering. Emily tells me you wish to go back to India. It will be very pleasant
to your father to have a neat, thorough housekeeper."

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Answer to Discussion Question

Do we have a gain or what?

4. Hedging is the process of eliminating exposure to foreign exchange risk so as to avoid

8. An enterprise is required to recognize all derivative financial instruments as assets or liabilities

1. C (Foreign exchange gain/loss on foreign currency transaction)

An import purchase causes a foreign currency payable to be carried on the

2. D (Method of accounting for foreign currency transactions)

Current accounting standards require a two-transaction perspective, accrual

3. B (Foreign exchange gain/loss on foreign currency transaction)

Foreign exchange gains related to foreign currency import purchases are

4. C (Calculate foreign exchange gain/loss on foreign currency transaction)

5. D (Calculate foreign exchange gain/loss on foreign currency borrowing)

6. D (Foreign exchange gain/loss on foreign currency transaction)

7. D (Calculate foreign exchange gain/loss)

The merchandise purchase results in a foreign exchange loss of $8,000, the

8. D (Forward contract cash flow hedge of foreign currency denominated

9. D (Forward contract fair value hedge of foreign currency firm commitment)

10. D (Determine the fair value of a forward contract)

11. C (Calculate foreign exchange gain/loss on foreign currency transaction)

12. B (Forward contract fair value hedge of foreign currency denominated

13. A (Forward contract cash flow hedge of forecasted foreign currency

The krona is selling at a premium in the forward market, causing Pimlico to

3/1 no journal entries

6/1 Premium Expense $10,000

Foreign Currency $57,500

14. C (Option cash flow hedge of forecasted foreign currency transaction)

15-17. (Option fair value hedge of a foreign currency firm commitment)

Loss on Firm Commitment $2,019.70

Foreign Currency (C$) $77,000

Firm Commitment $3,000

Net impact on 2016 net income:

17. B Net cash inflow with option ($80,000 – $2,000) $78,000

3/1 no journal entries

3/31 Forward Contract $1,250

Loss on Firm Commitment $1,250

Net impact on first quarter net income is $0.

4/30 Loss on Forward Contract $250

21-22. (Option cash flow hedge of a forecasted foreign currency transaction)

Option Expense decreases net income by $400.

Foreign Currency (BRL) [200,000 x $.41] $82,000

Parts Inventory $82,000

Accumulated Other Comprehensive Income (AOCI) $2,000

Net impact on 2016 net income:

23. (10 minutes) (Foreign currency payable -- import purchase)

24. (10 minutes) (Foreign currency receivable – export sale)

25. (10 minutes) (Foreign currency receivable – export sale)

9/15 Accounts Receivable (FCU) [100,000 x $.40] $40,000

9/30 Accounts Receivable (FCU) $2,000