On December 1, 2016, Ford Motors USA sold some cars to a French customer with th
ID: 2597903 • Letter: O
Question
On December 1, 2016, Ford Motors USA sold some cars to a French customer with the total selling price of € 1 Billion (Euros), payable on April 1, 2017.
Assuming the following US Dollar to Euro exchange rates:
December 1, 2016 2 US Dollar to 1 Euro
December 31, 2016 1. 50 US Dollars to 1 Euro
April 1, 2017 1.20 US Dollars to 1 Euro
Required
Record these transactions assuming the use of the two transaction approach (Assuming no hedging)
Record the transactions for all the relevant dates assuming that Ford Motors entered into a forward contract on December 1, 2016 to sell Euros at the rate of 2 US Dollars to 1 Euro for delivery on April 1, 2017
Explanation / Answer
Journal Entries :
Date Accounts Titles Debit $ Credit$ Dec 1 16 Account Receivables 2b Sales revenue 2b (being sale made) Dec 31 16 Unrealised Loss 0.50b Accounts Receivables 0.50b (being the exchange difference loss booked) Apr 1 17 Cash 1.20b Loss on exchange rate 0.80b Accounts Receivables 1.50b Unrealised Loss 0.50b (being the loss on exchange rate booked on receipt date) WHEN HEDGING DONE THROUGH FORWARD CONTRACT: Dec 1' 16 Accounts Receivables 2b Sales revenue 2b (being sales made) Dec 31 16 Unrealised Loss 0.50m Gain on Forward Contract 0.50m (being exchange loss covered by forward contract) Apr 1 17 Cash 2b Unrealised loss 0.30b Accounts Receivables 2b Gain on Forward Contract 0.30b (being payment received and the exchange rate loss covered by forward contract)Related Questions
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