1.On November 3, the spot price for cotton was $0.81/lb., and the February futur
ID: 2585969 • Letter: 1
Question
1.On November 3, the spot price for cotton was $0.81/lb., and the February futures price was $0.83/lb. On November 3, Levi Strauss sold 200 futures contracts on the commodity exchange at $0.83/lb. for delivery in February. Each contract was for 25,000 lbs. Levi Strauss designated these contracts as a cash flow hedge of 5 million lbs. of current inventory which it expected to sell in February. The average spot of this inventory when purchased was $0.58/lb. Levi Strauss properly documented the hedge and employed hedge accounting. On November 30, the company’s fiscal year end, the February commodity exchange futures price was $0.85/lb.
In the November 30 balance sheet, Levi Strauss should record the futures contracts as a
A: $100,000 asset
B: $100,000 liability
C: $4,250,000 liability
D: $4,250,000 asset
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2. On September 3, 2015, HH Corp. purchased merchandise for 10,000 units of the foreign company’s local currency. On that date, the spot rate was $1.35. HH paid the bill in full on February 15, 2016, when the spot rate was $1.45. The spot rate was $1.40 on December 31, 2015. What amount should HH report as a foreign currency transaction gain (loss) in its income statement for the year ended December 31, 2016?
A: $500
B: $1,000
C: ($500)
D: ($1,000)
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3. On November 2, 2014, Platt Co. entered into a 90 day futures contract to purchase 50,000 Swiss francs when the contract quote was $0.70. The purchase was for speculation in price movement. The following exchange rates existed during the contract period:
What amount should Platt report as foreign currency exchange loss in its income statement for the year ended December 31, 2014?
A: $2,500
B: $3,000
C: $3,500
D: $4,000
30 Day Futures Spot Rate November 2, 2014 $0.62 $0.63 December 31, 2014 $0.65 $0.64 January 31, 2015 $0.65 $0.68Explanation / Answer
Answer to question no 1
At the fiscal year end, rate has moved from $0.83 lb to $0.85 lb. It mean that Levi Struss has to buy at $0.85 lb and honour the forward contract for $0.83 lb. It results in a loss of $0.02 lb, so total loss would be $1,00,000 { 5,000,000 x (0.83-0.85)}.
So liability of $100,000 needs to be recognised.
Answer to question no 2
Value of creditors on different date as per the prevailing rate is given below:
Date Qty Rate Amount
September 2015 10,000 1.35 13,500
December 2015 10,000 1.4 14,000
It appears that creditors amount has increase from $13,500 to $14,000, it means that we have to pay more to creditors an account of unfavourable movement in exchange rate. Hence, there is a loss of $500.
Answer to question no 3
Platt Co has purchased a 90 days future contract to buy 50,000 swiss france at a cost of $0.70.
After two months that is at the end of December, 2017 30 days forward is available at $0.65, so it mean that Platt Co has incurred a loss of $2,500 [50,000 x(0.65-,70)]. This is because if Platt Co purchase 30 days forward then it has to pay $0.65 but as per the original contract it has to pay $0.7.
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