advancedaccounting_beams_chapter12_solutionmanual

8/12/2019 AdvancedAccounting_Beams_Chapter12_SolutionManual

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Chapter 12

Derivatives and Foreign Currency Transactions

Answers to Questions

1 Derivative is the name given to a broad range of financial securities. Their common characteristic is thatthe derivative contracts value to the investor is directly related to fluctuations in price, rate, or some othervariable that underlies it. Interest rate, foreign currency exchange rate, commodity prices and stock pricesare common types of prices and rate risks that companies hedge.

2 edge accounting refers to accounting designed to record changes in the value of the hedged item and thehedging instrument in the same accounting period. This enhances transparency because the hedged itemand hedging instrument accounting are linked. !rior to hedge accounting, the financial statement effectof the hedged item and hedging instrument "ere not linked. #ince companies enter into hedges tomitigate risks, the accounting should reflect the effect of this strategy and should clearly communicate thestrategy. The accounting and footnote disclosures re$uired for derivatives attempt to do this.

3 %n option is a contract that allo"s the holder to buy or sell a security at a particular date. The holder is

not obligated to buy or sell the security. They may allo" the contract to expire. Typically, the holder mustpay an upfront fee to the "riter of the option.

% for"ard contract and futures contract are similar because both sides of the contract are obligated toperform. % for"ard contract is negotiated bet"een t"o parties, they agree upon delivering a certain$uantity of goods or currency at a specific date in the future. &any allo" net settlement "hich means the'"inner( of the contract receives cash consideration for the difference bet"een the market price of thecommodity and the contracted amount on the date the contract expires. The initial amount exchanged atthe date the contract is entered into is negligible.

% futures contract is traded on a market. The amount of commodity to be exchanged and the date ofdelivery are standardi)ed. The futures rate is determined by the market at the date the contract is entered

into. These contracts are settled daily.

4 edge effectiveness involves assessing ho" "ell the hedge mitigates the gains or losses of the asset,liability and*or anticipated transaction that it is entered into to mitigate.

The most common approaches to determining hedge effectiveness are critical term analysis and statisticalanalysis.

+nder critical term analysis, the nature of the underlying variable, the notional amount of the derivativeand the item being hedged, the delivery date of the derivative and the settlement date for the item beinghedged are examined. If the critical terms of the derivative and the hedged item are identical, then aneffective hedge is assumed.

% statistical approach is used if critical terms dont match. ne such approach involves comparing the

correlation bet"een changes in the price of the item being hedged and the derivative. -hile the F%#does not specify a specific benchmark correlation coefficient, correlations of bet"een /01 and 2341 areconsidered to be highly effective. utside of these ranges, the hedge "ould not be considered highlyeffective.

5 +nder a firm purchase or sales commitment, if the hedge is considered to be effective, then it "ould$ualify as a fair value hedge.


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12-2 Derivatives and Foreign Currency Transactions

6 % company that has an existing loan that involves a variable or floating interest rate enters into a pay5fixed, receive variable s"ap. The company is s"apping its variable interest rate payments for fixed ones.These contracts are typically settled net. For example, if the fixed rate agreed upon is 201 for the term ofthe s"ap agreement and in one year the variable rate is 61, then the company "ith the variable rate loanmust pay the difference in rates multiplied by the notional amount of the loan to the other party. If thevariable rate is 231, then the company "ill receive the difference in rates multiplied by the notional

amount of the loan. 7egardless of the movement in interest rates over the term of the s"ap, the company"ill pay the fixed rate, net. This type of s"ap is aimed at reducing the variability in cash flo"s related tothe debt therefore it is designated as a cash flo" hedge.

7 % receive fixed, pay variable s"ap is entered into if a company has an existing loan that involves a fixedinterest rate and desires to s"ap those fixed payments for variable payments. For example, a company hasa loan "ith an /1 fixed rate and enters into a s"ap arrangement so that it "ill pay 8I7 9 21. If thevariable rate for a year is 61, then the company "ill pay 21 multiplied by the notional amount as "ell asthe /1 for the loan. Thus, the company has paid 61, the floating rate.

If the variable rate is :1 ;41 8I7 9 21


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Chapter 12 12-3

14 %t the transaction date, assets and liabilities denominated in foreign currency are translated into dollarsby use of the exchange rate in effect at that date, and they are recorded at that amount.

%t the balance sheet date, cash and amounts o"ed by or to the enterprise that are denominated inforeign currency are adusted to reflect the current rate. %ssets carried at market "hose current marketprice is stated in a foreign currency are adusted to the e$uivalent dollar market price at the balance sheetdate.

15 Exchange gains and losses occur because of changes in the exchange rates bet"een the transaction dateand the date of settlement. oth exchange gains and exchange losses can occur in either foreign importactivities or foreign export activities. The statement is erroneous.

16 Exchange gains and losses on foreign currency transactions are reflected in income in the period in "hichthe exchange rate changes except for hedges of an identifiable foreign currency commitment "heredeferral is possible if certain re$uirements are met. %lso hedges of a net investment in a foreign entity aretreated as e$uity adustments from translation. Intercompany foreign currency transactions of a long5termnature are also treated as e$uity adustments.

17 There "ill be a ?30 exchange loss in the period of purchase and a ?20 exchange gain in the period ofsettlement=

Billing datePurchases $1,450

ccounts pa!able "#c $1,450

Year-end adjustment

E%change loss $ 20

ccounts pa!able "#c $ 20

Settlement date

ccounts pa!able "#c $1,4&0

'ash $1,4(0

E%change gain 10

18 Cash flo" hedge accounting can be used "hen hedging recogni)ed currency denominated assets andliabilities if the variability of cash flo"s is completely eliminated by the hedge. This criterion is generallymet if all of the critical terms of the hedged item and the hedge match such as the settlement date,currency type and currency amounts. If these dont match then it must be accounted for as a fair valuehedge.

The key difference bet"een this situation and the more general cash flo" hedge case is that an existingasset or liability is being accounted for here. +nder the more general case, the recognition of gains andlosses is deferred because an anticipated transaction is being hedged.The foreign currency asset or liability is marked to fair value at year5end and the resulting gain or lossaccount is recogni)ed, ho"ever, the gain or loss is offset by reclassifying an e$ual amount from othercomprehensive income. Thus, the asset and liability are marked to fair value, but no gain or loss relatedto that adustment is included in current period income.

The premium or discount related to the hedge contract is amorti)ed to income over the length of thecontract using the effective interest method. For example, if a 200,000 euro foreign currency receivable

due in :0 days is recorded at the spot rate of ?2.30*euro or ?230,000 and at the same date, a for"ardcontract is entered into to deliver 200,000 euros in :0 days at a for"ard rate of ?2.2/, the company kno"sthat it "ill lose ?3,000. This ?3,000 must be amorti)ed to income over the :0 day period.

19 International %ccounting #tandards o. @3 and @6 prescribe the accounting for derivatives. Theirre$uirements are similar to #F%# o. 2@@ and 2@/ in terms of determining "hen hedge accounting can beused. The re$uirements for determining hedge effectiveness are very similar. oth fair value and cashflo" hedge definitions and general re$uirements are similar. o"ever, under I%# @6, firm sale orpurchase commitments can be accounted for as either fair value or cash flo" hedges "hich differs fromthe F%# re$uirement that they must be accounted for as fair value hedges.

2009 Pearson Education, Inc. publishing as Prentice Hall


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20 % for"ard contract of an anticipated foreign currency transaction is accounted for as a cash flo" hedge.The contract is marked to fair value at each financial date and the corresponding gain or loss is includedin other comprehensive income. %ny premium or discount must be amorti)ed to income over the contractterm using an effective interest rate method. The gain ;loss< credit ;debit< is offset by a debit ;credit< fromother comprehensive income.

-hen the anticipated transaction occurs and the for"ard contract is settled, the resulting othercomprehensive income balance is amorti)ed to income in the same period as the underlying transaction isrecogni)ed in income.



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Chapter 12 12-5

SOLUTIONS TO EXERCISES

Solution E12-1

1 a. December 1, 2008No entry is necessary

b. December 31, 2008)ther 'o*prehensi+e Inco*e "-E $9,901

or/ard 'ontract " $9,901

or/ard contract +alue at 12310"$1,000 $90500 6 $10,000

"1.00526 $9,901 liabilit!

c. Settlement date February 28, 2009


or/ard 'ontract " 2,500

)ther 'o*prehensi+e Inco*e "-E $12,401

or/ard contract +alue at 2209"$1,000 $1,005500 6 $2,500

asset. 7he #or/ard contract liabilit! at 12310 is eli*inated

and the asset established. ccordingl!, the corresponding creditto other co*prehensi+e inco*e, $12,401, /ill result in an ending

balance o# $2,500 credit in other co*prehensi+e inco*e.

8ice In+entor! "$1,005 500 $502,500

'ash $502,500

7o record the rice purchase at *aret price

'ash $2,500


7o record the #or/ard contract settle*ent

2

'ash $(00,000

-ales $(00,000

'ost o# :oods -old $500,000

)ther 'o*prehensi+e Inco*e 2,500

In+entor! $502,500

Solution E12-2

1 a. December 1, 2008

No entry is necessary

b. December 31, 2008oss on #or/ard contract $9,901

or/ard 'ontract $9,901

or/ard contract +alue at 12310"$1,000 $90500 6 $10,000

"1.00526 $9,901 liabilit!

ir* Purchase 'o**it*ent $9,901

:ain on #ir* purchase co**it*ent $9,901



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12-( Derivatives and Foreign Currency Transactions

c. Settlement date February 28, 2009


or/ard 'ontract 2,500

:ain on #or/ard contract $12,401

or/ard contract +alue at 2209"$1,000 $1,005500 6 $2,500

asset.

oss on #ir* purchase co**it*ent $12,401

ir* purchase co**it*ent " $9,901

ir* purchase co**it*ent " 2,500

8ice In+entor! $500,000

ir* purchase co**it*ent 2,500

'ash $502,500

7o record the rice purchase at *aret price

'ash $2,500



2.

'ash $(00,000

-ales $(00,000

'ost o# :oods -old $500,000

In+entor! $500,000

Solution E12-3

1 ;o+e*ber 1, 200


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Chapter 12 12-7

"7o record the change in #air +alue o# the

#or/ard contract attributable to the discounted

change in the #or/ard price

3 ir* -ales 'o**it*ent $149,&51

:ain on #ir* sales co**it*ent $149,&51

"7o record the change in #air +alue o# the #ir*

co**it*ent to sell

3 'ash #ro* #ir* sales co**it*ent $500,000

?idget in+entor! "@- $500,000

'):- $500,000

:ain on #ir* sales co**it*ent $100,000

'ash #or #or/ard contract purchase $500,000

?idget in+entor! "@- $500,000

-ales $(00,000

7o record the settle*ent o# the #or/ard

contract at >anuar! 31, 2009, and purchase o#100,000 /idgets and sale pursuant to the

contract

Solution E12-4 Usin! a "i#e$ attribute "o$el% ot&er solutions are acce'table(

)ctober 1, 200

1 Earnings $49,012

or/ard contract $49,012

"100,000 % "$2.00 $1.50"1.05A4

7o record the change in #air +alue o# the



1 In+entor! $50,000

Earnings $50,000

7o record in+entor! *ared to *aret

=ece*ber 31, 200

2 or/ard contract $49,&51

Earnings $49,&51

"100,000 % "$2.00 $2.50"1.05

7o record the change in #air +alue o# the



2 Earnings $50,000In+entor! $50,000

7o record in+entor! *ared to *aret

>anuar! 31, 2009

3 'ash $200,000

Earnings &39

or/ard 'ontract " $200,&39




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12- Derivatives and Foreign Currency Transactions

"100,000 % "$2.00 $2.30

3 'ash $200,000

In+entor! $200,000

7o sell in+entor! on contract

Solution E12-)

1 b

2 d

3 d

Solution E12-*

1 7he dollar has /eaened against the !en because it no/ costs *ore

dollars to bu! one !en.

2 10,000,000 !en $.00&5 6 $&5,000

3 ccounts pa!able $&5,000

E%change loss 1,000

'ash $&(,000

4 Bi**er /ould ha+e entered a contract to purchase !en #or #uture receipt.

Solution E12-+

December 16, 2008

In+entor! $3(,000

ccounts pa!able "euros $3(,000

7o record purchase o# *erchandise #ro* ?ing 'orporation #or

30,000 euros at $1.20 spot rate.

December 31, 2008

E%change loss $ 1,500

ccounts pa!able "euros $ 1,500

7o adCust accounts pa!able to ?ingD "$1.25 $1.20 30,000

euros.

anuary 1!, 2009

ccounts pa!able "euros $3&,500

E%change gain $ 300

'ash 3&,200

7o record pa!*ent o# 30,000 euros at $1.24 spot rate in

settle*ent o# account pa!able and to recognie gain.

Solution E12-,

dCust*ent in +alue o# account recei+able #or 200D

"$.4 $.0 90,000 '$ 6 $3,(00 e%change gain

dCust*ent in +alue o# account recei+able at settle*ent in 2009D



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Chapter 12 12-9

"$.3 $.4 90,000 '$ 6 $900 e%change loss

Solution E12-

"ay 1, 2008

ccounts recei+able "#c $333,333

-ales $333,3337o record sale o# in+entor! ite*s to 8o!al #or 200,000 poundsD

200,000 pounds.(000 pounds "indirect Fuotation.

"ay 30, 2008

'ash "#c $330,5&9

E%change loss 2,&54

ccounts recei+able "#c $333,333

7o record receipt o# 200,000 pounds #ro* 8o!al in settle*ent o#

accounts recei+ableD 200,000 pounds.(050 pounds.

Solution E12-1GI'P adapted

1

8ecei+able at 10150 $420,000

Euros recei+ed and sold #or

.-. dollars on 111(0

415,000

oreign e%change loss 200 5,000

2 )n =ece*ber 31, 200 Ju*i 'orp. adCusts its account pa!able deno*inated

in euros #ro* $12,000 "10,000.$1.20 to $12,400 "10,000 $1.24 and

recognies a loss o# $400 G10,000 ' "$1.24 $1.20

3

=ece*ber 31, 200 note pa!able $240,000

>ul! 1, 2009 note pa!able 20,0002009 e%change loss $"40,000

4

;ote recei+able =ece*ber 31, 200 $140,000

*ount collected >ul! 1, 2009

"40,000 ' 105,000

2009 e%change loss $ 35,000

Solution E12-11

1 E%change gain or loss in 200D :ain or "oss

ccount recei+able =ece*ber 1( $103,500

=ece*ber 31 adCusted balance150,000 '$ $0.( 102,000 $"1,500

ccount pa!able =ece*ber 2 $195,250

=ece*ber 31 adCusted balance

2&5,000 '$ $0.( 1&,000 ,250

;et e%change gain #or 200 $ (,&50

2 E%change gain or loss in 2009D

ccount recei+able adCusted 1231 $102,000



10/24


ccount recei+able 11509 101,250 $ "&50

ccount pa!able adCusted 1231 $1&,000

ccount pa!able 13009 1,3&5 "1,3&5

;et e%change loss #or 2009 $"2,125

Solution E12-12

1 December 12, 2008

In+entor! $3&5,000

ccounts pa!able "!en $3&5,000

Purchase #ro* 7oo 'o*pan! "50,000,000 !en $.00&50.

December 1!, 2008

ccounts recei+able "pounds $ ((,000

-ales $ ((,000

-ale to @ritish Products 'o*pan! "40,000 pounds $1.(5.

2 December 31, 2008


ccounts pa!able "!en $ 5,000

7o adCust accounts pa!able deno*inated in !en #or e%change rate

changeD 50,000,000 !en "$.00&(0 $.00&50.


ccounts recei+able "pounds $ 2,000

7o adCust accounts recei+able deno*inated in pounds #or e%change

rate changeD 40,000 pounds "$1.(5 $1.(0.

3 anuary 11, 2009

ccounts pa!able "!en $30,000

E%change loss 2,500

'ash $32,500

7o record pa!*ent to 7oo 'o*pan! "50,000,000 !en $.00&(5.

anuary 1#, 2009

'ash $ (5,200

ccounts recei+able "pounds $ (4,000

E%change gain 1,200

7o record receipt #ro* @ritish Products 'o*pan!D 40,000 pounds

$1.(3.

Solution E12-13

"arc$ 1, 2008

In+entor! $1(,300

ccounts pa!able "pesos $1(,300

7o record purchase o# in+entor! ite*s deno*inated in pesosD

100,000 pesos $.1(30.

or/ard contractKno entr! is necessar!



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Chapter 12 12-11

"ay 30, 2008

'ash "pesos $1(,000

E%change loss 500

'ash $1(,500

7o record receipt o# 100,000 pesos #ro* the e%change broer /hen

the e%change rate is $.1(00. E%change lossD 100,000 pesos "$.1(50 $.1(00.

ccounts pa!able "pesos $1(,300

'ash "pesos $1(,000

E%change gain 300

7o record pa!*ent to 'a+ilier o# 100,000 pesos. :ainD 100,000

pesos "$.1(30 $.1(00.

Solution E12-14

1 December 1, 2008In+entor! $5,500

ccounts Pa!able "!en $5,500

-pot rate is $.0005510,000,000 6 $5,500

;o entr! is necessar! related to the #or/ard contract is necessar! at

this date.

December 31, 2008

E%change oss $100

ccounts Pa!able "!en $100

Entr! to *ar the accounts pa!able to the spot rate at !earend.

)ther 'o*prehensi+e Inco*e $100

E%change gain $100

*ount reclassi#ied out o# other co*prehensi+e inco*e in order to

o##set the e%change loss since this is a cash #lo/ hedge

situation.

E%change oss $99.10

)ther co*prehensi+e inco*e $99.10

7he discount resulting #ro* the #or/ard contract is a*ortied to

inco*e o+er the contractLs ter*. 7o sol+e #or the e##ecti+e

interest rate $5,500"1r26 $5,&00. $5,&00 6 the #or/ard rate .

0005&10,000,000 6 $5,&00. -ol+ing #or r6 1.0195M. 7he

discount a*ortiation #or this is .010195$5,500 6 $99.10.

Su""ary/ loss o# $99.10 is re#lected in 200 inco*e.

2 anuary 30, 2009

E%change oss $100

ccounts Pa!able $100

7o *ar ccounts Pa!able to spot rate



12/24


'ash "!en $5,&00

'ash $5,&00

7o record receipt o# 10,000,000 pesos #ro* the e%change broer.

)ther 'o*prehensi+e Inco*e $100

E%change :ain $1007o record pa!*ent o# cash to the e%change broer.

E%change oss $100.90

)ther 'o*prehensi+e Inco*e $100.90

7o record a*ortiation o# discount #or the last portion o# the

#or/ard contractLs ter*.

Su""ary/ loss o# $100.90 is re#lected in 2009 inco*e. ;otice that the

balance in )ther 'o*prehensi+e Inco*e is no/ $0. "12310 $100 debit N

$99.10 credit 6 $.90 debit 12310. $.90 debit 100 debit $100.90 credit

6 $0 balance at 13009.

Solution E12-1)GI'P adapted

1 ssu*ing that this is a #air +alue hedge. t 12310, $3,000 is the

#or/ard contract #air +alue G100,000"$.90 #or/ard rate contracted

$.93 or/ard contract rate at 12310 6 $3,000.

-ince this contract /ill not be settled #or &2 da!s, the present +alue

o# the contract is $2,929 using .032M Gi612M3(5 da!s , n6&2 and

#uture +alue o# $3,000. 7he e%change gain related to this contract is

recorded at 12310 and the #or/ard contract asset account is debited.

December 31, 2008


E%change :ain $2,929

7o record #or/ard contract at *aret

E%change oss $10,000

ccounts Pa!able $10,000

7o *ar accounts pa!able to #air +alue at 12310 "this assu*es that

the accounts pa!able /as *ared to *aret on 12120, the date the

#or/ard contract /as entered into

2 7his #ir* purchase co**it*ent /ould be accounted #or as a #air +alue

hedge.

December 31, 2008


E%change :ain $2,929

E%change oss $2,929

ir* purchase co**it*ent $2,929

3 7he #or/ard contract /ould again be recorded at #air +alue throughout

the li#e o# the contract. 7here#ore, a $2,929 gain /ould be reported

at 12310.



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Chapter 12 12-13

Solution E12-1*

%&ril 1, 2008

'ontract recei+able $35,250

'ontract pa!able "#c $35,250

7o record #or/ard contract to sell 50,000 'anadian dollars to the

e%change broer at the #or/ard rate o# .&05 #or deli+er! on


14/24


Solution E12-1+

1 Entr! on ;o+e*ber 2 #or contract /ith the e%change broerD

'ontract recei+able "#c $ &,00

'ontract pa!able $ &,007o record contract to purchase 1,000,000 !en in 90 da!s at the

#uture rate.

I# this contract allo/ed #or net settle*ent, then no entr! /ould be

necessar! on ;o+e*ber 2.

2 ;o Cournal entr! needed as the 30da! #uture rate at the end o# the

!ear is at $.00& /hich /as the sa*e rate as the 90da! rate on

;o+e*ber 2.

Solution E12-1,

Co""ent/7he contract recei+able and pa!able are both recorded instead o#

recording the contract net because


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Chapter 12 12-15

2. 7his /ould be accounted #or as a cash #lo/ hedge since this is a hedge

o# an anticipated transaction.

3. )(*ember 2, 2008

utures contract $100,000

'ash $100,000

=eposit is $5,000 20 contracts 6 $100,000

December 31, 2008

)ther 'o*prehensi+e Inco*e $50,000

utures 'ontract $50,000

t 12310, the #utures contract price #or deli+er! on the sa*e date

as our contract is $(.&5 $&.00 6 $.25 loss per


16/24

12-1( Derivatives and Foreign Currency Transactions

2. 7his is a #air +alue hedge because a #ir* purchase co**it*ent is being

hedged instead o# an anticipated purchase.

3.

-il+er options $1,000

'ash $1,000

4. December 31, 2008

oss on #ir* purchase co**it*ent $1,194,030

'hange in +alue o# #ir* purchase co**it*ent $1,194,030

-il+er options $1,193,030

:ain $1,193,030

1,200,000 $1 change "$10$9 6 $1,200,000 /hich /ill occur in 1

*onth "purchase and option e%piration. $1,200,0001.005 6 $1,194,030.

7his is the present +alue o# the #ir* purchase co**it*ent and the

option at 12310 assu*ing (M annual interest.

-ince the option alread! has a $1,000 balance, $1,193,030 /ill need to

be recorded.

).

'hange in +alue o# #ir* purchase co**it*ent $594,030

:ain $594,030

7o record the change in the #ir* purchase co**it*ent. "$9 $9.50

1,200,000. 7he ending balance is $(00,000 a#ter this adCust*ent.

oss $594,030

-il+er option $594,030

7he sil+er options +alue has also declined. Ho/e+er, the co*pan! /ill

still e%ercise the option.

'ash $(00,000

-il+er option $(00,000

7o record e%ercise o# option.

-il+er in+entor! $11,400,000

'hange in +alue o# #ir* purchase co**it*ent (00,000

'ash $12,000,000

7o record purchase o# sil+er in+entor!.

Solution 123

1 7he purpose o# this hedge is to reduce +ariabilit! in cash #lo/s in the

#uture since the #ir* entered into a +ariable interest loan and is

s/apping that #or a #i%ed interest rate. 7his is there#ore a cash #lo/

hedge.

2 )ne /ould e%pect that this is a highl! e##ecti+e hedge because the

notional a*ount, $400,000 and the length o# the ter* o# the s/ap

agree*ent agree.

3 a. 7he I@)8 rate at 12310 is 5M, thus 2009Ls interest rate on the

+ariable loan /ill be 5M 2M 6 &M. 7he s/ap #i%ed rate is M.

'a*pion /ill pa! .01 percent *ore than the +ariable rate. 7he #air



17/24

Chapter 12 12-17

+alue o# the s/ap is the present +alue o# the esti*ated #uture net

pa!*ents.

=ate o# pa!*ent Esti*ated pa!*ent

based on 12310

I@)8 rate

actor Present Oalue

123109 .01$400,000 1"1.0& $ 3,&3123110 .01$400,000 1"1.0&2 3,493

123111 .01$400,000 1"1.0&3 3,2(5

123112 .01$400,000 1"1.0&4 3,051

7otal $13,54&

b.

December 31, 2008

)ther 'o*prehensi+e Inco*e "-E $13,54&

Interest 8ate -/ap " $13,54&

7o record the #air +alue o# interest rate s/ap, cash #lo/ hedge

at 12310.

Interest E%pense $32,000

'ash $32,000

7o record interest pa!*ent.

4.

December 31, 2009


'ash $ 2,000

7o record pa!*ent to Oeneta @an o# the interest e%pense #or the

!ear under the +ariable rate loan. 7he rate set on the loan at

1109 /as &M.

Interest E%pense $ 4,000

'ash $ 4,000

7o record the pa!*ent due on the interest rate s/ap because the

#i%ed rate is M. 7his represents the net settle*ent a*ount.

Interest rate s/ap " $ ,34&

)ther 'o*prehensi+e Inco*e "-E $ ,34&

7o record the change in #air +alue o# the interest rate s/ap.

7he ne/ +ariable rate #or 2010 /hich is set at 123109 is 5.5M

2M. s a result, the esti*ated a*ount that 'a*pion /ould pa! is

reduced #ro* 1M to .5M.

=ate o# pa!*ent Esti*ated pa!*entbased on 12310

I@)8 rate

actor Present Oalue

12310 .005$400,000 1"1.0&5 $ 1,(0

123109 .005$400,000 1"1.0&52 1,&31

123110 .005$400,000 1"1.0&53 1,(10

7otal $ 5,200



18/24


7he unadCusted Interest 8ate -/ap liabilit! is $13,54& credit, the

adCusted is $5,200 credit, the Interest 8ate -/ap iabilit! *ust be

reduced b! $,34&.

Solution 12-4

1, 2 Per @alance E%change :ain@oos -heet or "oss

%cc(unts recei*able

.-. dollars $2,500 $2,500

-/edish rona "20,000 $.(( 11,00 13,200 $1,400

@ritish pounds"25,000 $1.(5 41,000 41,250 250

$1,300 $2,950 1,(50

%cc(unts &ayable

.-. dollars $ (,50 $ (,50

'anadian dollars "10,000 $.&0 &,(00 &,000 $ (00

@ritish pounds "15,000 $1.(5 24,450 24,&50 "300

$3,900 $3,(00 300

;et e%change gain $1,950

3 'ollect recei+ablesD

'ash $2,500

ccounts recei+able $2,500

7o record collection o# accounts recei+able.

'ash $13,400

ccounts recei+able "rona $13,200

E%change gain 200

7o collect 20,000 rona at $.(& spot rate.

'ash $40,&50

E%change loss 500ccounts recei+able "pounds $41,250

7o collect 25,000 pounds at $1.(3 spot rate.

4 -ettle*ent o# accounts pa!ableD

ccounts pa!able $ (,50

'ash $ (,50

7o record pa!*ent o# accounts deno*inated in dollars.

ccounts pa!able "'anadian $ $ &,000

E%change loss 100

'ash $ &,100

7o record pa!*ent o# account deno*inated in 'anadian dollars at$.&1 spot rate.

ccounts pa!able "pounds $24,&50

'ash $24,300

E%change gain 450

7o record pa!*ent o# 15,000 pounds at $1.(2 spot rate.



19/24

Chapter 12 12-19

Solution 12-)

1, 2 @alance E%change :ain

Per @oos -heet or "oss

%cc(unts recei*able

@ritish pounds "100,000 1.((0 $1(5,000 $1((,000 $1,000Euros "250,000 $.(&0 1(5,000 1(&,500 2,500

-/edish rona "1(0,000 $.(40 105,(00 102,400 "3,200

>apanese !en "2,000,000 $.00&( 15,000 15,200 200

$450,(00 $451,100 500

%cc(unts &ayable

'anadian dollars"150,000 $.(9 $105,000 $103,500 $1,500

-/edish rona "220,000 $.135 2,(00 29,&00 "1,100

>apanese !en "4,500,000 $.00&( 33,300 34,200 "900

$1((,900 $1(&,400 "500

;et e%change gain $ 0

3 7he co*pan! /ould need to enter into a contract to deli+er 250,000

euros "sell the* since it /ould be recei+ing euros and /ould need to

con+ert the* into - dollars.

Solution 12-*

1. 7his is a #air +alue hedge because the #i%ed rate loanLs #air +alue

#luctuates o+er ti*e as *aret interest rates change. @! entering into

this s/ap agree*ent that #luctuation is eli*inated. -o /hile the

interest rate #luctuates, the loanLs #air +alue re*ains constant

re#lecting the #i%ed rate in the s/ap.

2. ie P12(, the ter*s *atch, thus this is considered to be a highl!

e##ecti+e hedge.

3. a.


based on 12310

I@)8 rate

actor Present Oalue

123109 .01$400,000 1"1.09 $ 3,(&0

123110 .01$400,000 1"1.092 3,3(&

123111 .01$400,000 1"1.093 3,09

123112 .01$400,000 1"1.094 2,34

7otal $12,9(0

b. December 31, 2008


'ash $32,000

7o record interest due on #i%ed rate loan at 12310



20/24


oan Pa!able " $12,9(0

Interest 8ate -/ap $12,9(0

7o record the interest rate s/ap at #air +alue, co*putations belo/.

;otice that the carr!ing +alue o# the loan is no/ $3&,040 "$400,000

$12,9(0. 7his agrees /ith the present +alue o# the loan at the *aretrate o# 9M.

roo7/ $400,000"1.0946 $23,3&0 Q6 the present +alue o# the *aturit!

+alue. 7he present +alue o# the interest pa!*ents is

$32,000POI"i69,n646 $103,(&0.

7he total *aret +alue o# the loan is $23,3&0 $103,(&0 6 $3&,041.

4.

December 31, 2009


'ash $32,000

7o record interest due on #i%ed rate *ortgage


'ash $4,000

7o record s/ap pa!*ent

Interest 8ate -/ap $&,52

oan Pa!able $&,52

7o adCust interest rate s/ap to #air +alue, $5,10.

;otice that no/ the loan pa!able carr!ing +alue isD

$400,000 N 12,9(0 &,52 6 $394,92. 7his a*ount agrees /ith the

present +alue o# the loan at the *aret rate on this date, .5M.

Proo#D $400,000"1.0536 $313,1(3KPresent +alue o# the *aturit! +alue

o# the loan.

7he present +alue o# the interest pa!*ents 6 $32,000POI"i6.5,n636

$1,&29.

7he present +alue o# the loan at a *aret rate o# .5M is there#ore

$313,1(3 $1,&29 6 $394,92.

Solution 12-+



based on 12310

I@)8 rate

actor Present Oalue

123110 .005$400,000 1"1.05 1,43

123111 .005$400,000 1"1.052 1,(99

123112 .005$400,000 1"1.053 1,5((

7otal $ 5,10


21/24

Chapter 12 12-21

1 Entries on pril 1

ccounts recei+able "pesos $33,0(0

-ales $33,0(0

7o record sales on account deno*inated in pesosD 200,000 pesos

(.049( 's

;o entr! to record the contract is necessar!

2 Entries on


22/24


7o record the change in the +alue o# the underl!ing #ir*

co**it*ent hedged.

Purchases $32,00

'ash "euros $32,00

7o record purchase and pa!*ent in euros at $.(5(0 spot rate.

'hange in +alue o# #ir* co**it*ent $ 1,050

Purchases 1,050

7o record the adCust*ent o# purchases #or the change in the +alue

o# the #ir* co**it*ent. 7his e##ecti+el! #i%es the purchase at

the original #or/ard rate.

Solution 12-

?e /ill assu*e that the hedge contract is to be settled net.

December 2, 2008

;o entr!

December 31, 2008

)ther co*prehensi+e inco*eD e%change loss $ 4,950

or/ard contract $ 4,950

or/ard contract, 12310, $1.(9 N contract rate $1.( 6 $.01

500,000 6 $5,000. 7his is to be paid in t/o *onths so the

present +alue assu*ing (M annual interest rate isD $5,000

"1.00526 $4,950.

E%change oss $ 3,34(

)ther co*prehensi+e inco*e $ 3,34(

7o record discount a*ortiation. -ee table belo/

"arc$ 1, 2009

'ash "#c $55,000

-ales $55,000

7o record deli+er! o# eFuip*ent to 8a*sa! td. and collection o#

500,000 pounds at the $1.&1 spot rate.

)ther co*prehensi+e inco*eD e%change loss $10,050


7o increase the #or/ard contract to the #inal liabilit! a*ountD

$1.&1$1.( 6 $.03500,000 6 $15,000 $4,950 6 $10,050

adCust*ent.

E%change oss $(,(53

)ther co*prehensi+e inco*e $(,(53

7o record discount a*ortiation. "-ee table belo/


'ash $15,000

7o record #or/ard contract pa!*ent.

-ales $10,000

)ther co*prehensi+e inco*e $10,000



23/24

Chapter 12 12-23

=iscount a*ortiationD

7he spot rate at the date the #or/ard contract /as entered into

$1.&0500,000 6 $50,000. $1.( 500,000 6 $40,000. 7he discount o#

$10,000 *ust be a*ortied o+er the contract period. 7he e##ecti+e

interest rate eFuates these t/o a*ounts using a 3 *onth ti*e period,that rate is .393&M.

=ate =iscount a*ortiation @alance

$ 50,000

=ece*ber 31, 200 $ 3,34( 4(,(54

>anuar! 31, 2009 3,333 43,320


24/24


E%change loss "net 1,994

3 anuary 1!, 2009

ccounts pa!able "#c $4,000E%change gain $ 4,000

7o *ar the accounts pa!able to #air +alue.

)ther co*prehensi+e inco*e $,020

or/ard contract $ ,020

7o *ar the #or/ard contract to #air +alue.

E%change loss $4,000

)ther 'o*prehensi+e Inco*e $ 4,000

7o record the reclassi#ication #ro* )'I to o##set the e%change

gain on the accounts pa!able

E%change loss $2,00()ther 'o*prehensi+e Inco*e $2,00(

7o record the a*ortiation o# the pre*iu*

7he total pre*iu* is $4,000 "$(&2,000 $((,000, the portion

le#t to be a*ortied is $4,000 $1,994 6 $2,00(.

'ash "#c $(5(,000

or/ard contract 1(,000

'ash $(&2,000

7o record the settle*ent o# the #or/ard contract.

ccounts pa!able "#c $(5(,000

'ash "#c $(5(,000

7o record pa!*ent o# accounts pa!able in pounds.

>anuar! 15, 2009 account balancesD

ccounts Pa!ableD $0

or/ard 'ontractD

$&,90 credit $,020 N $1(,000 6 $0

)ther 'o*prehensi+e Inco*eD

$2,014 credit $,020 dr $4,000 cr $2,00( cr 6 $0

E%change oss "netD $2,00(

advancedaccounting_beams_chapter12_solutionmanual

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