Kiwi Painting Company engages in a number of foreign currency transactions in eu
ID: 2396096 • Letter: K
Question
Kiwi Painting Company engages in a number of foreign currency transactions in euros (). For each of the following independent transactions, determine the dollar amount to be reported in the December 31. 2004, financial statements for the items presented in the following requirements. The relevant direct exchange rates for the euro follow September 1 November 30, December 31, 2004 $1.05 1.02 2004 $0.90 0.96 2004 $0.98 1.01 Spot rate Forward rate for exchange on February 1, 2005 These are the independent transactions 1. Kiwi entered into a forward exchange contract on September 1, 2004, to be settled on February 1, 2005, to hedge a firm foreign currency commitment to purchase inventory on November 30, 2004, with payment due onFebruary 1, 2005. The forward contract was for 14,000, the agreed-upon cost of the inventory. The derivative is designated as a fair value hedge of the firm commitment 2. Kiwi entered into a forward exchange contract on September 1, 2004, to be settled on February 1, 2005, to hedge a forecasted purchase of inventory on November 30, 2004. The inventory was purchased on November 30 with payment due on February 1, 2005. The forward contract was for 14,000, the expected cost of the inventory. The derivative is designated as a cash flow hedge to be continued through to payment of the euro-denominated account payable. 3. Kiwi entered into a forward contract on November 30, 2004, to be settled on February 1, 2005, to manage the financial currency exposure of a euro-denominated accounts payable in the amount of 14,000 from the purchase of inventory on that date. The payable is due on February 1, 2005. The forward contract is not designated as a hedge. 4. Kiwi entered into a forward contract on September 1, 2004, to speculate on the possible changes in exchange rates between the euro and the U.S. dollar between September 1, 2004, and February 1, 2005. The forward contract is 14,000 for speculation purposes and is not a hedge Required Enter the dollar amount that would be shown for each of the following items as of December 31, 2004. Compute the statement amounts net. For example, if the transaction generated both a foreign currency exchange gain and a loss, specify just the net amount that would be reported in the financial statementsExplanation / Answer
ANSWER TO THIS QUESTION
Transaction 1
September 1:
Foreign Currency Receivable from Exchange Broker 13,440
Dollars Payable to Exchange Broker 13,440
(€14,000 x $0.96)
November 30:
Foreign Currency Receivable from Exchange Broker 840
Foreign Currency Transaction Gain 840
[€14,000 x ($1.02 - $0.96)]
Foreign Currency Transaction Loss 840
Firm Commitment 840
Inventory (plug) 13,860
Firm Commitment (from above) 840
Accounts Payable (€14,000 x $1.05) 14,700
December 31:
Foreign Currency Transaction Loss 140
Foreign Currency Receivable from Exchange
Broker 140
[€14,000 x ($1.01 - $1.02)]
Accounts Payable 980
Foreign Currency Gain 980
[€14,000 x ($0.98 - $1.05)]
Foreign Currency Receivable from Exchange Broker (Forward Contract Receivable) =
$13,440 + $840- $140 = $14,140
Inventory = $13,860
Accounts Payable = $14,700 - $980 = $13,720
Foreign Currency Transaction Gain/Loss (Foreign Currency Exchange Gain/Loss) =
$840 gain - $840 loss - $140 loss + $980 gain = $840 gain
Other Comprehensive Income Gain/Loss Net = N/A
Transaction 2
September 1:
Foreign Currency Receivable from Exchange Broker 13,440
Dollars Payable to Exchange Broker 13,440
(€14,000 x $0.96)
November 30:
Foreign Currency Receivable from Exchange Broker 840
Other Comprehensive Income 840
[€14,000 x ($1.02 - $0.96)]
Inventory 14,700
Accounts Payable 14,700
(€14,000 x $1.05)
December 31:
Other Comprehensive Income 140
Foreign Currency Receivable from Exchange
Broker 140
[€14,000 x ($1.01 - $1.02)]
Accounts Payable 980
Foreign Currency Transaction Gain 980
[€14,000 x ($0.98 - $1.05)]
Foreign Currency Transaction Loss 980
Other Comprehensive Income 980
Note: Need to reclassify amount from OCI sufficient to completely offset the foreign currency transaction gain on the foreign currency accounts payable
Foreign Currency Receivable from Exchange Broker (Forward Contract Receivable) =
$13,440 + $840 - $140 = $14,140
Inventory = $14,700
Accounts Payable = $14,700 - $980 = $13,720
Foreign Currency Transaction Gain/Loss (Foreign Currency Exchange Gain/Loss) = N/A Other Comprehensive Income Gain/Loss Net = $840 gain - $140 loss + $980 gain =
$1,680 net gain
Transaction 3
November 30:
Foreign Currency Receivable from Exchange Broker 14,280
Dollars Payable to Exchange Broker 14,280
(€14,000 x $1.02)
Inventory 14,700
Accounts Payable 14,700
(€14,000 x $1.05)
December 31:
Foreign Currency Transaction Loss 140
Foreign Currency Receivable from Exchange
Broker 140
[€14,000 x ($1.01 - $1.02)]
Accounts Payable 980
Foreign Currency Gain 980
[€14,000 x ($0.98 - $1.05)]
Foreign Currency Receivable from Exchange Broker (Forward Contract Receivable) =
$14,280 - $140 = $14,140
Inventory = $14,700
Accounts Payable = $14,700 - $980 = $13,720
Foreign Currency Transaction Gain/Loss (Foreign Currency Exchange Gain/Loss) =
- $140 loss + $980 gain = $840 gain
Other Comprehensive Income Gain/Loss Net = N/A
Transaction 4
September 1:
Foreign Currency Receivable from Exchange Broker 13,440
Dollars Payable to Exchange Broker 13,440
(€14,000 x $0.96)
December 31:
Foreign Currency Receivable from Exchange Broker 700
Foreign Currency Transaction Gain 700
[€14,000 x ($1.01 - $0.96)]
Foreign Currency Receivable from Exchange Broker (Forward Contract Receivable) =
$13,440 + $700 = $14,140
Inventory = N/A Accounts Payable = N/A
Foreign Currency Transaction Gain/Loss (Foreign Currency Exchange Gain/Loss) =
$700 gain
Other Comprehensive Income Gain/Loss Net = N/A
Transaction
1 2 3 4
Forward Contract Receivable $14,140 $14,140 $14,140 $14,140
Inventory 13,860 14,700 14,700 NA Accounts Payable 13,720 13,720 13,720 NA Foreign Currency Exchange 840 G NA 840 G 700 G
Gain (Loss), net
Other Comprehensive
Income
Gain (Loss), net
NA 1,680 G NA NA
Computational support:
Forward Contract Receivable: $14,140 = €14,000 x $1.01 12/31 forward rate
Inventory: $13,860 = $14,700 accounts payable less $840 firm commitment
$14,700 = €14,000 x $1.05 11/30 spot rate
Accounts Payable: $13,720 = €14,000 x $0.98 12/31 spot rate
Foreign Currency Exchange Gain or (Loss), net:
Transaction 1: $840 = $ 840 exchange gain on forward contract from change in forward rate from 9/1 to
11/30: (€14,000 x ($1.02 -$0.96))
- $840 exchange loss on firm commitment for change in forward rate from 9/1 to
11/30: (€14,000 x ($1.02 -$0.96))
- 140 exchange loss on forward contract from change in forward rate from 11/30 to
12/31: (€14,000 x ($1.01 -$1.02))
+ 980 exchange gain on account payable for change in spot rate from 11/30 to
12/31: (€14,000 x ($0.98 -$1.05))
Transaction 2: No net foreign currency exchange gain because ASC 815 specifies an offset of the gain from the revaluation of the account payable by an equal amount from other comprehensive income.
Transaction 3: $840 = $980 exchange gain on account payable from change in spot rate from 11/30 to 12/31: (€14,000 x ($0.98 -$1.05))
- 140 exchange loss on forward contract from change in forward rate from 9/1 to 12/31: (€14,000 x ($1.01 -$1.02))
Transaction 4: $700 = $700 exchange gain on forward contract from change in forward rate from 9/1 to 12/31: (€14,000 x ($1.01 -$0.96))
Other Comprehensive Income Gain or (Loss), net:
Transaction 2: $1,680 = $ 700 OCI gain on forward contract from change in forward rate from 9/1 to 12/31: (€14,000 x ($1.01 -$0.96))
+ 980 OCI gain on the reclassification from OCI to offset the exchange gain on the account payable from the change in the spot rate from 11/30 to 12/31, as required by ASC 815:
(€14,000 x ($0.98 -$1.05))
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