International Accounting
Chapter 2
Chapter 2
Foreign Currency Transactions and Hedging
Foreign Exchange Risk
 Basic Concepts:
➢ Direct quotes:
indicate the number of local currency units that are equivalent to one unit of the foreign
currency. For Example: in Egypt (1$ = 15 EGP)
➢ Indirect quotes:
indicate the number of foreign currency units are equivalent to one unit of the local
currency. Indirect quotes are simply the inverse of direct quotes.
For Example: in Egypt (1EGP = 0.067$)
------------------------------------------------------------------------------------------------
 Foreign Currency Transactions:
1) Export Sale:
Sales are made to foreign customers who will pay in a later date in their own
currency which will expose the seller to a foreign exchange risk.
2) Import purchase:
Purchases are made from a foreign supplier where payment is made in the
supplier’s currency.
 Foreign Exchange risk happens when changes in foreign currency exchange rate
results in:
a) Exporter will receive less.
b) Importer will pay more than anticipated.
------------------------------------------------------------------------------------
 Example 1:
 Suppose that on February 1, 2011, Joe Inc., a U.S. company (the seller) makes a sale
and ships goods to Jose SA, a Mexican customer, (the buyer). Sale price is $ 100,000
(U.S.). However, it is agreed that Jose (the buyer) will pay in Pesos (the Mexican
currency) on March 2, 2011.
 Assume the following spot rates :
Date
$ 0.10 per peso
$ 0.09 per peso
February 1, 2011
March 2 , 2011
Required:
1) How many Pesos does Jose agree to pay?
2) Record all Journal Entries for Joe Inc., to record the sale and the collection.
Grade Four
1
Dr/ Moataz El Haddad
International Accounting
Chapter 2
Solution:
1
Peso
?? Pesos
$ 0.10
$ 100,000
1) Jose agreed to pay 1,000,000 Pesos ($ 100,000 / $ 0.10).
2) Even though Jose (the buyer) agrees to pay 1,000,000 Pesos, Joe Inc., (the seller)
records the sale in U.S. dollars on February 1, 2011 as follow:
Feb. 1, 2011 Dr Accounts Receivable
Cr Sales Revenues
$ 100,000
$ 100,000
On March 2, 2011, Joe Inc., will receive 1,000,000 pesos, which now worth $ 90,000
(1,000,000× $ 0.09). Joe makes the following journal entry:
March. 2, 2011
Dr Cash
Dr Foreign Exchange Loss
Cr Accounts Receivable
$ 90,000
$ 10,000
$100,000
---------------------------------------------------------------------------------------
‫مهمه جداااااا‬
Balance Sheet Date before Date of Payment:
The general consensus worldwide is that a foreign currency receivable or foreign
currency payable should be revalued at the balance sheet date to account for the
change in exchange rates.
Grade Four
2
Dr/ Moataz El Haddad
International Accounting
Chapter 2
 Balance Sheet Date before Date of Payment: ‫مهم جدا‬
Example 2:
Suppose that on December 1, 2010, Joe Inc., a U.S. company (the seller) makes a sale
and ships goods to Jose SA, a Mexican customer, (the buyer) for 1,000,000 pesos.
They agreed that Jose would pay in pesos on March 2, 2011.
The following spot rates for dollars and pesos are:
Date
December 1, 2010
$ 0.11 per peso
December 31, 2010
$ 0.105 per peso
March 2, 2011
$ 0.09 per peso
Required:
Prepare all journal entries for Joe Inc., to record this sale and collection assuming the
company closes its books on Dec., 31 to prepare financial statements.

Answer:
 Joe, Inc., records the sale (in U.S. $) on December 1, 2010 as follow:
Dec. 1, 2010
Dr Accounts Receivable (1,000,000 * $ 0.11)
Cr Sales
$ 110,000
$ 110,000
 On Dec. 31, Joe must revalue the amount of A/R and recognize the difference as a
foreign exchange gain or loss by making the following journal entry:
Dec. 31, 2010
Dr Foreign exchange loss
$ 5,000
Cr Accounts Receivable
To revalue the A/R on Dec. 31 (105,000 – 110,000)
$ 5,000
 On March 2, 2011 Joe records the receivable collection and an additional foreign
exchange loss based on the spot rate on March 2, 2011 by making the following journal
entry:
March. 2, 2011
Grade Four
Dr Cash (1,000,000 * $ 0.09)
Dr Foreign exchange loss
Cr Accounts Receivable
3
$ 90,000
$ 15,000
$ 105,000
Dr/ Moataz El Haddad
International Accounting
Chapter 2
Example 3:
Suppose that on December 1, 2010, Joe Inc., a U.S. company (the seller) makes a sale
and ships goods to Jose SA, a Mexican customer, (the buyer) for 1,000,000 pesos.
They agreed that Jose would pay in pesos in installments as follow:
 400,000 pesos to be paid on December 10, 2010
 The remaining to be paid on March 2, 2011.
Assume the following spot rates for dollars and pesos are:
Date
December 1, 2010
$ 0.11 per peso
December 10, 2010
$ 0.12 per peso
December 31, 2010
$ 0.105 per peso
March 2, 2011
$ 0.09 per peso
Required:
Prepare all journal entries for Joe Inc. books

Answer:
 Joe, Inc., records the sale (in U.S. $) on December 1, 2010 as follow:
Dec. 1, 2010
Dr Accounts Receivable (1,000,000 * $ 0.11)
Cr Sales
$ 110,000
$ 110,000
 On December 10, 2010 Joe records the receivable collection of 200,000 pesos and an
additional foreign exchange gain based on the spot rate on December 10 2010 by making
the following journal entry:
December 10,
2010
Dr Cash (400,000 * $ 0.12)
Cr Foreign exchange gain
Cr Accounts Receivable
$ 48000
$ 4,000
$ 44,000
 On Dec. 31, Joe must revalue the amount of remaining A/R (600,000 pesos) and
recognize the difference as a foreign exchange gain or loss by making the following
journal entry:
Dec. 31, 2010
Dr Foreign exchange loss
$ 3,000
Cr Accounts Receivable
To revalue the A/R on Dec. 31 (63,000 – 66,000)
$ 3,000
 On March 2, 2011 Joe records the receivable collection and an additional foreign
exchange loss based on the spot rate on March 2, 2011 by making the following journal
entry:
March. 2, 2011
Grade Four
Dr Cash (600,000 * $ 0.09)
Dr Foreign exchange loss
Cr Accounts Receivable
4
$ 54,000
$ 9,000
$ 63,000
Dr/ Moataz El Haddad
International Accounting
Chapter 2
Exercise 1:
‫يا ريت تحله بايدك عشان تدرب نفسك‬
 Suppose that on October 1, 2021, EGX Corp., an Egyptian company, makes a sale
and ships goods to Salamat SDN, a Malaysian customer, for Ringgit 100,000. They
agreed that Salamat will pay in Ringgit on January 10, 2022.
 Assume the following spot rates:
Date
Spot rate
October 1 , 2021
December 31, 2021
January 10, 2022
1 Ringgit = 10 EGP
1 Ringgit = 8 EGP
1 Ringgit = 9 EGP
Required:
Prepare all required journal entries for EGX book.
Answer:
1) EGX will records the sale (in EGP) on October 1, 2021 as follow:
Oct. 1, 2021
Dr A/R (100,000 × 10)
EGP 1,000,000
Cr Sales Revenues
To record the sales for EGX on October 1, 2021
EGP 1,000,000
2) On Dec. 31, 2021 EGX must revalue the amount of A/R and recognize the change as a
foreign exchange gain or loss by making the following journal entry:
Dec. 31, 2021
Dr Loss on Foreign Exchange
EGP 200,000
Cr A/R
EGP 200,000
To revalue the A/R on Dec. 31 (800,000 – 1,000,000)
3) On January 10, 2022, EXG records the receivable collection by making the following
journal entry:
Jan. 10, 2022
Dr Cash (100,000 × 9)
EGP 900,000
Cr Gain on Foreign Exchange
EGP 100,000
Cr A/R
EGP 800,000
To record the collection for EGX
---------------------------------------------------------------------------------------------------------
Grade Four
5
Dr/ Moataz El Haddad
International Accounting
Chapter 2
Exercise 2:
‫يا ريت تحله بايدك عشان تدرب نفسك‬
 Suppose that on October 1, 2021, EGX Corp., an Egyptian company, makes a sale
and ships goods to Salamat SDN, a Malaysian customer, for Ringgit 100,000. They
agreed that Salamat will pay in Ringgit in installments as follow:
 20,000 Ringgit to be paid on November 10, 2021
 The remaining to be paid on January 10, 2022.
 Assume the following spot rates:
Date
Spot rate
October 1 , 2021
November 10, 2021
December 31, 2021
January 10, 2022
1 Ringgit = 10 EGP
1 Ringgit = 11 EGP
1 Ringgit = 8 EGP
1 Ringgit = 9 EGP
Required: Prepare all required journal entries for EGX book.
Solution:
1) EGX will records the sale (in EGP) on October 1, 2021 as follow:
Oct. 1, 2021
Dr A/R (100,000 × 10)
EGP 1,000,000
Cr Sales Revenues
To record the sales for EGX on October 1, 2021
EGP 1,000,000
2) On November 10, 2021, EGX records the receivable collection of 20,000 Ringgit by
making the following journal entry:
Nov. 10, 2022
Dr Cash (20,000 × 11)
EGP 220,000
Cr Foreign Exchange Gain
Cr A/R (20,000× 10)
To record the collection of 20,000 Ringgit for EGX
EGP 20,000
EGP 200,000
3) On Dec. 31, 2021 EGX must revalue the amount of A/R (80,000 Ringgit) and recognize
the change as a foreign exchange gain or loss by making the following journal entry:
Dec. 31, 2021
Dr Foreign Exchange Loss
EGP 160,000
Cr A/R
EGP 160,000
To revalue the A/R on Dec. 31 (FV= 640,000 – BV= 800,000)
4) On January 10, 2022, EGX records the receivable collection of 80,000 Ringgit by making
the following journal entry:
Jan. 10, 2022
Grade Four
Dr Cash (80,000 × 9)
EGP 720,000
Cr Foreign Exchange Gain
Cr A/R (80,000 × 8)
To record the collection of 80,000 Ringgit for EGX
6
EGP 80,000
EGP 640,000
Dr/ Moataz El Haddad
International Accounting
Chapter 2
Hedging Foreign Exchange Risk:
Protects from exchange rate fluctuations.
❖ The two most common derivatives used to hedge foreign exchange risk are:
1) Foreign currency forward contracts
Obligation to buy or sell foreign currency at a future date.
2) Foreign currency options
Right to buy or sell foreign currency for a period of time.
----------------------------------------------------------------------------------------------------------
 Fundamental Requirement of Derivatives Accounting:
 In accounting for derivative financial instruments, the fundamental requirement is
that all derivatives must be carried on the balance sheet at their fair value.
 The first issue in accounting for derivatives is the determination of 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.
 The second issue in accounting for derivatives is the treatment of the unrealized
gains and losses that arise from these adjustments.
➢Gains and losses arising from changes in the fair value of derivatives are
recognized initially either:
(1) on the income statement as a part of net income or,
(2) on the balance sheet as a component of other comprehensive income.
--------------------------------------------------------------------------------------------------------------- HEDGES OF FOREIGN-CURRENCY-DENOMINATED ASSETS AND
LIABILITIES:
➢ Hedges of foreign-currency-denominated assets and liabilities, such as accounts
receivable and accounts payable, can qualify as either cash flow hedges or fair
value hedges.
➢ To qualify as a cash flow hedge, the hedging instrument must completely offset the
variability in the cash flows associated with the foreign currency receivable or
payable.
➢If the hedging instrument does not qualify as a cash flow hedge, or if the company
elects not to designate the hedging instrument as a cash flow hedge, the hedge is
designated as a fair value hedge.
Grade Four
7
Dr/ Moataz El Haddad
International Accounting
Chapter 2
Example: ‫مهم جدا جدا جدا‬
 On December 1, 2010, Eximco Corp., (a U.S. Company) makes a sale and ships goods
to a Spanish customer for € 1,000,000. They agreed that payment will be made in
euros on March 1, 2011.
 On December 1, 2010, Eximco enters into a three-months forward contract with
First National Bank to sell € 1,000,000 at a forward rate of $ 1.485 on March 1, 2011.
 Relevant exchange rates for euros on various dates are as follow:
Date
December 1, 2010
December 31, 2010
March 1, 2011
Spot rate
$ 1.50
$ 1.51
$ 1.48
Forward rate
$ 1.485
$ 1.496
 The annual interest rate is 12% (1 % monthly). Eximco must close its books and
prepare financial statements on December 31.
Required:
A. Assuming that Eximco designates the forward contract as a cash flow hedge of a
foreign currency receivable,
1. Prepare journal entries for these transactions in U.S dollars.
2. What is the effect on Year 1 net income and Balance sheet?
3. What is the effect on Year 2 net income?
4. What is the effect on net income over the two accounting periods?
B. Assuming that Eximco designates the forward contract as a fair value hedge of
foreign currency receivable,
1. Prepare journal entries for these transactions in U.S dollars.
2. What is the effect on Year 1 net income and Balance sheet?
3. What is the effect on Year 2 net income?
4. What is the effect on net income over the two accounting periods?
Grade Four
8
Dr/ Moataz El Haddad
International Accounting
Chapter 2
Solution:
We must account for the foreign currency transaction (Original Contract)
and the related forward contract simultaneously but separately.
A) FC Asset / Forward Contract / Exporter
Cash Flow Hedge
Original Contract:
Date
December 1, 2010
December 31, 2010
March 1, 2011
Spot
rate
$ 1.50
$ 1.51
$ 1.48
U.S $ Dollar value
€ 1,000,000 × $ 1.50 = $ 1,500,000
€ 1,000,000 × $ 1.51 = $ 1,510,000
€ 1,000,000 × $ 1.48 = $ 1,480,000
Change in
U.S $
-----+ $ 10,000
− $ 30,000
--------------------------------------------------------------------Forward Contract:
Date
December 1, 2010
December 31, 2010
March 1, 2011
Forward rate
Fair Value
$ 1.485
$ 1.496
$ 1.48 ??
$0
($ 10,783)
$ 5,000
Change in
fair value
---− $ 10,783
+ $ 15,783
 Fair value on the Forward Contract on December 31, 2010:
Forward rate in December 1, 2010 = € 1,000,000 × $ 1.485
Forward rate in December 31, 2010 = € 1,000,000 × $ 1.496
Loss on forward contract
Present Value = Future value ×
1
(𝟏+𝒓)𝒏
= ($ 11,000) ×
$ 1,485,000
$ 1,496,000
($ 11,000)
1
(𝟏+𝟎.𝟎𝟏)𝟐
($ 11,000) × 0.9803 = ($ 10,783)
 Fair value on the Forward Contract on March 1, 2011:
Forward rate in December 1, 2010 = € 1,000,000 × $ 1.485
$ 1,485,000
Forward rate in March 1, 2011
= € 1,000,000 × $ 1.48
$ 1,480,000
Gain on forward contract
$ 5,000
-----------------------------------------------------------------------------------------------
Grade Four
9
Dr/ Moataz El Haddad
International Accounting
Chapter 2
 Forward Contract was purchased at Discount:
Spot rate on Dec. 1, 2010
Forward rate on Dec.1, 2010
€ 1,000,000 × $ 1.50 = $ 1,500,000
€ 1,000,000 × $ 1.485 = $ 1,485,000
Discount = $15,000
 Discount Amortization using the Straight-Line Method:
 Dec.1, 2010 to Dec 31, 2010 (1 month)
= $ 15,000 ×
1
3
= $ 5,000
2
 Dec.31, 2010 to March 1, 2011 (2 month) = $ 15,000 × = $ 10,000
3
----------------------------------------------------------------------------1) Journal Entries:
Date
Dec. 1 , 2010
Dec. 31 , 2010
(offset)
Original Contract
Dr A/R
$ 1,500,000
Cr Sales
$ 1,500,000
Dr A/R
$ 10,000
Cr Foreign exchange gain $ 10,000
Forward Contract
No Entry is Required
Dr loss on forward contract $ 10,000
Cr AOCI
$ 10,000
Dr AOCI
$ 10,783
CR Forward Contract $ 10,783
OR
The above two entries could be made in
one entry as follow:
Dr loss on forward contract $10,000
Dr AOCI
$ 783
CR Forward Contract $ 10,783
Fair Value of the
forward contract
Discount
Amortization
Effect on Year 1 Net income:
Sales
Foreign exchange gain
Loss on forward contract
Net gain or loss
Discount Expense
Effect on Net income
Grade Four
Dr Discount Expense $ 5,000
CR AOCI
$ 5,000
$ 1,500,000
10,000
(10,000)
$0
($ 5,000)
$ 1,495,000
10
Dr/ Moataz El Haddad
International Accounting
Chapter 2
The effect on Year 1 Balance Sheet:
Assets:
Liabilities:
Accounts Receivable
($ 1,500,000 + $ 10,000)
$ 1,510,000 Forward Contract
Equity:
Retained Earnings
AOCI ($ 10,000 – 10,783 + 5,000)
$ 1,510,000
Date
March 1 , 2011
(offset)
Original Contract
$ 10,783
$ 1,495,000
$ 4,217
$ 1,510,000
Forward Contract
Dr Foreign exchange loss $ 30,000
Dr AOCI
$ 30,000
Cr A/R
$ 30,000 Cr gain on forward contract $ 30,000
Dr Forward Contract $ 15,783
CR AOCI
$ 15,783
OR
The above two entries could be made in
one entry as follow:
Dr Forward Contract $15,783
Dr AOCI
,$14,217
CR Gain on forward contract $30,000
Discount
Amortization
Collection
Dr Discount Expense $ 10,000
CR AOCI
$ 10,000
Dr Cash
$ 1,485,000
Dr Foreign currency $ 1,480,000
Cr
Foreign
currency
$ 1,480,000
CR A/R $ 1,480,000
Cr Forward Contract
$
5,000
(‫)متمم‬
Effect on Year 2 Net income:
Foreign exchange loss
Gain on forward contract
Net gain or loss
Discount Expense
effect on Net income =
(30,000)
30,000
$0
($ 10,000)
($ 10,000)
The effect on Net Income over the two Accounting Periods:
$ 1,495,000 - $ 10,000 = $ 1,485,000
---------------------------------------------------------------------------------------
Grade Four
11
Dr/ Moataz El Haddad
International Accounting
Chapter 2
Important Notes:
❑ The net effect on the balance sheet over the two years is an increase in
cash of $1,485,000 with a corresponding increase in retained earnings of
$1,485,000.
❑ The cumulative Discount Expense of $15,000 reflects the cost of
extending credit to the Spanish customer.
❑ The net benefit from having entered into the forward contract is
$5,000. Eximco has a cash inflow of $1,485,000 rather than only the
$1,480,000 that would have been received without a forward contract.
This “gain” is reflected in net income as the difference between the net Gain
on Forward Contract and the cumulative Discount Expense ($20,000 −
$15,000 = $5,000) recognized over the two periods.
Grade Four
12
Dr/ Moataz El Haddad
International Accounting
Chapter 2
We must account for the foreign currency transaction (Original Contract)
and the related forward contract simultaneously but separately.
B) FC Asset / Forward Contract / Exporter
Fair Value Hedge
1) Journal Entries:
Date
Dec. 1 , 2010
Dec. 31 , 2010
Original Contract
Forward Contract
Dr A/R
$ 1,500,000
Cr Sales
$ 1,500,000
No Entry is Required
Dr A/R
$ 10,000
Cr Foreign exchange gain $ 10,000
Fair Value of the
forward contract
Dr Loss on Forward Contract $ 10,783
CR Forward Contract $ 10,783
Effect on Year 1 Net income:
Sales
Foreign exchange gain
10,000
Loss on forward contract
(10,783)
Net gain or loss
Effect on Net income
$ 1,500,000
$ (783)
$ 1,499,217
The effect on Year 1 Balance Sheet:
Assets:
Accounts Receivable
($ 1,500,000 + $ 10,000)
Liabilities:
$ 1,510,000 Forward Contract
Equity:
Retained Earnings
$ 1,510,000
Grade Four
13
$ 10,783
$ 1,499,217
$ 1,510,000
Dr/ Moataz El Haddad
International Accounting
Chapter 2
Date
Original Contract
March 1, 2011
Dr Foreign exchange loss $ 30,000
Cr A/R
$ 30,000
Fair Value of the
forward contract
Collection
Forward Contract
Dr Forward Contract $ 15,783
CR Gain on Forward Contract $ 15,783
Dr Cash
$ 1,485,000
Dr Foreign currency $ 1,480,000
Cr Foreign currency
$ 1,480,000
CR A/R $ 1,480,000
Cr Forward Contract
$
5,000
(‫)متمم‬
Effect on Year 2 Net income:
Foreign exchange loss
Gain on forward contract
Net gain or loss
effect on Net income =
($ 30,000)
15,783
($ 14,217)
($ 14,217)
The effect on Net Income over the two Accounting Periods:
$ 1,499,217 - $ 14,217 = $ 1,485,000
---------------------------------------------------------------------------------------
Important Notes:
❑ The net effect on the balance sheet over the two years is an increase in cash of
$1,485,000 with a corresponding increase in retained earnings of $1,485,000.
❑ Under the Fair Value Hedge Accounting, the original forward contract discount $
15,000 is not amortized systemically over the life of the contract. Instead it is
recognized in income as the difference between the foreign exchange Gain (loss) on
the accounts receivable and the Gain (loss) on the forward Contract, that is, ($783)
in Year 1 and ($14,217) in Year 2. The net impact on the net income over the two
years is ($ 15,000), which reflects the cost of extending credit to the Spanish customer.
❑ The net gain on Forward Contract of $ 5,000 ($10,783 loss in Year 1 and $ 15,783 gain
in Year 2) reflects the net benefit – that is increase in cash inflow – from Eximco’s
decision to hedge the euro receivable.
Grade Four
14
Dr/ Moataz El Haddad
International Accounting
Chapter 2
Example 2:
‫الزم تحلها بورقة و قلم بايدك‬
On December 1, 2010, Joe Inc., a U.S. Company makes a sale and ships goods to
Jose, SA, a Mexican customer, with payment of 1,000,000 pesos (The Mexican
currency) to be received on March 1, 2011.
Joe enters into forward contract on Dec. 1, 2010 to sell 1,000,000 pesos on March 1,
2011. Relevant exchange rates for pesos on various dates are as follow:
Date
December 1, 2010
December 31, 2010
March 1, 2011
Spot rate
$ 0.11
$ 0.10
$ 0.105
Forward rate
$ 0.12
$ 0. 095
The present value factor for two months is 0.990. Joe must close its books and
prepare financial statements on December 31.
Required:
1. Assuming that Joe designates the forward contract as a cash flow hedge of a
foreign currency receivable, Prepare journal entries for these transactions in U.S dollars.
What is the impact on Year 1 net income and Balance sheet?
What is the impact on Year 2 net income?
What the impact on Net Income over the two accounting periods?
2. Assuming that Joe designates the forward contract as a fair value hedge of foreign
currency receivable, Prepare journal entries for these transactions in U.S dollars.
What is the impact on Year 1 net income and Balance sheet?
What is the impact on Year 2 net income?
What the impact on Net Income over the two accounting periods?
Solution:
C) FC Asset / Forward Contract / Exporter
Cash Flow Hedge
Original Contract:
ate
Spot rate
Dec.1, Year 1
Dec. 31, Year 1
March 1, Year 2
Grade Four
$ 0.11
$ 0.10
$ 0.105
1,000,000 pesos × $ 0.11
1,000,000 pesos × $ 0.10
1,000,000 pesos × $ 0.105
15
U.S $
Dollar
value
$ 110,000
$ 100,000
$ 105,000
Change in
U.S $
-----(-) $ 10,000
+ $ 5,000
Dr/ Moataz El Haddad
International Accounting
Forward Contract:
Date
December 1, Year 1
December 31, 2010
March 1, 2011
Chapter 2
Forward rate
Fair Value
$ 0.12
$ 0.095
$ 0.105??
0
$ 24,752
$ 15,000
Change in fair
value
-----+$ 24,752
- $ 9,752
 Fair value on the Forward Contract on December 31, Year 1:
Forward rate in December 1, 2010 = 1,000,000 pesos * $ 0.12 = $ 120,000
Forward rate in December 31, 2010 = 1,000,000 pesos * $ 0.095 = $ 95,000
Gain on forward contract
$ 25,000
1
Present Value = Future value ×
= $ 25,000 × 0.990 = $ 24,752
(1 + r) n
 Fair value on the Forward Contract on March 1, 2011:
Forward rate in December 1, 2010 = 1,000,000 pesos * $ 0.12 = $ 120,000
Forward rate in March 1, 2011 = 1,000,000 pesos * $ 0.105 =
$ 105,000
Gain on forward contract
$ 15,000
 Forward Contract was purchased at Premium:
Spot rate on Dec. 1, 2010
forward rate on Dec.1, 2010
1,000,000 pesos * $ 0.12= $ 120,000
1,000,000 pesos * $ 0.11 = $ 110,000
Premium = $ 10,000
 Premium Amortization:
 Dec.1 to Dec 31 (1 month)
$ 10,000 × 1/3 = $ 3,333
 Dec. 31 to March 1 (2 months)
$ 10,000 × 2/3 = $ 6,667
Grade Four
16
Dr/ Moataz El Haddad
International Accounting
Chapter 2
Journal Entries:
Date
Original Contract
Forward Contract
Dec. 1 , 2010
Dr A/R
$ 110,000
CR Sales
$ 110,000
Dec. 31 , 2010
Dr Foreign exchange loss $ 10,000 Dr AOCI
$ 10,000
Cr A/R
$ 10,000
Cr gain on forward contract $10,000
Fair Value of the
forward contract
Dr Forward Contract $ 24,752
CR AOCI $ 24,752
Premium
Amortization
Dr AOCI
3,333
Cr Premium Revenue
$ 3,333
Impact on Year 1 Net income:
Sales
Foreign exchange loss
Gain on forward contract
Net gain or loss
Premium Revenue
Impact on Net income =
$ 110,000
($ 10,000)
$10,000
$0
$ 3,333
$ 113,333
The effect on Year 1 Balance Sheet:
Assets:
Accounts Receivable
($ 110,000 -$ 10,000)
Forward Contract
Liabilities:
$ 100,000
$ 24,752
$ 124,752
Grade Four
17
Equity:
Retained Earnings
$ 113,333
AOCI
$ 11,419
(-10,000 +24,752-3,333)
$ 124,752
Dr/ Moataz El Haddad
International Accounting
Chapter 2
Date
Original Contract
March 1 , 2011
Forward Contract
Dr A/R
$ 5,000
Dr loss on forward contract $ 5,000
Cr Foreign exchange gain $ 5,000
Cr AOCI
$ 5,000
Fair Value for the
forward contract
Dr AOCI
$ 9,752
CR Forward Contract $ 9,752
Premium
Amortization
Dr AOCI
6,667
Cr Premium Revenue
Collection
Dr Foreign currency $ 105,000
CR A/R $ 105,000
$ 6,667
Dr Cash
$ 120,000
Cr Foreign currency
$ 105,000
Cr Forward Contract
$ 15,000
(‫)متمم‬
Impact on Year 2 Net income:
Foreign exchange gain
loss on forward contract
Net gain or loss
Premium Revenue
Impact on Net income =
5,000
(5,000)
$0
$ 6,667
$ 6,667
Impact on NI over the two Accounting periods ($ 113,333 + $ 6,667) = $ 120,000
B) FC Asset / Forward Contract / Exporter
Fair Value Hedge
Date
Original Contract
Forward Contract
Dec. 1 , 2010
Dr A/R
$ 110,000
CR Sales
$ 110,000
Dec. 31 , 2010
Dr Foreign exchange loss $ 10,000
Cr A/R
$ 10,000
Fair Value of the
forward contract
Dr Forward Contract $ 24,752
CR Gain on forward contract$ 24,752
Impact on Year 1 Net income:
Sales
Foreign exchange loss
Gain on forward contract
Net gain or loss
Impact on Net income =
Grade Four
$ 110,000
(10,000)
24,752
$ 14,752
$ 124,752
18
Dr/ Moataz El Haddad
International Accounting
Chapter 2
The effect on Year 1 Balance Sheet:
Assets:
Accounts Receivable
($ 110,000 - $ 10,000)
Forward Contract
Liabilities:
$ 100,000
24,752
Equity:
Retained Earnings
$ 104,752
Date
Original Contract
March 2 , 2011
$ 124,752
$ 124,752
Forward Contract
Dr A/R
$ 5,000
Cr Foreign exchange gain $ 5,000
Fair Value for the
forward contract
Collection
Dr Foreign currency $ 105,000
CR A/R $ 105,000
Dr Loss on forward contract $9,752
CR Forward Contract $ 9,752
Dr Cash
$ 120,000
Cr Foreign currency
$ 105,000
Cr Forward Contract
$ 15,000
(‫)متمم‬
Impact on Year 2 Net income:
Foreign exchange gain
loss on forward contract
Net gain or loss
5,000
(9,752)
($ 4,752)
Impact on Net income =
($ 4,752)
Impact on NI over the two Accounting periods ($ 124,752 - $ 4,752) = $ 120,000
Grade Four
19
Dr/ Moataz El Haddad
International Accounting
Chapter 2
‫مهم جدا جدا جدا حاول تحله برضه موجود في ورق الدكتور اللي نزل عال منصة‬
Example 3:
On Dec 1, 2010, Joe Inc., a U.S. Company makes a sale and ships goods to Jose,
SA, a Mexican customer. Sale price is $ 110,000 U.S. Jose agrees to pay 1,000,000
pesos on March 2, 2011.
Joe enters into a foreign currency forward contract on Dec. 1, 2010. The contract
calls for Joe to sell 1,000,000 pesos at a forward rate of $ 0.105 on March 2, 2011.
Relevant exchange rates for pesos on various dates are as follow:
Date
Spot rate
Forward rate
December 1, 2010
$ 0.11
$ 0.105
December 31, 2010
$ 0.10
$ 0.096
March 1, 2011
$ 0.095
The annual interest rate is 6% (0.5 % monthly). Joe must close its books and
prepare financial statements on December 31.
Required:
a. Assuming that Joe designates the forward contract as a cash flow hedge of a
foreign currency receivable, Prepare journal entries for these transactions in U.S dollars.
What is the impact on Year 1 net income and Balance sheet?
What is the impact on Year 2 net income?
b. Assuming that Joe designates the forward contract as a fair value hedge of foreign
currency receivable, Prepare journal entries for these transactions in U.S dollars.
What is the impact on Year 1 net income and Balance sheet?
What is the impact on Year 2 net income?
Solution:
A) FC Asset / Forward Contract / Exporter
Cash Flow Hedge
Original Contract:
Date
December 1, Year 1
December 31, Year 1
March 1, Year 2
Grade Four
Spot
rate
$ 0.11
$ 0.10
$ 0.095
U.S $ Dollar Change in
value
U.S $
-----1,000,000 pesos × $ 0.11 $ 110,000
1,000,000 pesos × $ 0.10 $ 100,000 (-) $ 10,000
(-) $ 5,000
1,000,000 pesos × $ 0.095 $ 95,000
20
Dr/ Moataz El Haddad
International Accounting
Chapter 2
Forward Contract:
Date
December 1, Year 1
December 31, 2010
March 1, 2011
Forward
rate
$ 0.105
$ 0.096
$ 0.095??
Fair Value
0
$ 8,911
$ 10,000
Change in fair
value
-----+ $ 8,911
+ $ 1,089
 Fair value on the Forward Contract on December 31, Year 1:
Forward rate in December 1, 2010 = 1,000,000 pesos * $ 0.105 = $ 105,000
Forward rate in December 31, 2010 = 1,000,000 pesos * $ 0.096 = $ 96,000
Gain on forward contract
$ 9,000
1
1
Present Value = Future value ×
= $ 9,000 ×
(1 + r)
n
(1+ 0.5%) 2
= $ 9,000 × 0.990 = $ 8,911
 Fair value on the Forward Contract on March 1, 2011:
Forward rate in December 1, 2010 = 1,000,000 pesos * $ 0.105 = $ 105,000
Forward rate in March 2, 2011 = 1,000,000 pesos * $ 0.095 =
$ 95,000
Gain on forward contract
$ 10,000
 Forward Contract was purchased at discount:
Spot rate on Dec. 12, 2010
forward rate on Dec.12, 2010
1,000,000 pesos * $ 0.11 = $ 110,000
1,000,000 pesos * $ 0.105= $ 105,000
Discount = $ 5,000
 Discount Amortization:
 Dec.1 to Dec 31 (1 month)
$ 5,000 × 1/3 = $ 1,667
 Dec. 31 to March 2 (2 months)
$ 5,000 × 2/3 = $ 3,333
Grade Four
21
Dr/ Moataz El Haddad
International Accounting
Chapter 2
Journal Entries:
Date
Original Contract
Forward Contract
Dec. 1 , 2010
Dr A/R
$ 110,000
CR Sales
$ 110,000
Dec. 31 , 2010
Dr Foreign exchange loss $ 10,000
Cr A/R
$ 10,000
Fair Value of the
forward contract
Discount
Amortization
Dr AOCI
$ 10,000
Cr gain on forward contract $10,000
Dr Forward Contract $ 8,911
CR AOCI $ 8,911
Dr Discount Expense $ 1,667
CR AOCI $ 1,667
Impact on Year 1 Net income:
Sales
Foreign exchange loss
Gain on forward contract
Net gain or loss
Discount Expense
Impact on Net income =
$ 110,000
(10,000)
10,000
$0
($ 1,667)
$ 108,333
The effect on Year 1 Balance Sheet:
Assets:
Accounts Receivable
($ 110,000 - $ 10,000)
Forward Contract
Liabilities:
$ 100,000
$ 8,911
Equity:
Retained Earnings
AOCI
(-10,000+8911+1667)
$ 108,911
Date
March 2 , 2011
Original Contract
Dr Foreign exchange loss $ 5,000
Cr A/R
$ 5,000
Grade Four
$ 108,911
Forward Contract
Dr AOCI
$ 5,000
Cr gain on forward contract
$ 5,000
Dr Forward Contract $ 1,089
CR AOCI $ 1,089
Fair Value for the
forward contract
Discount
Amortization
Collection
$ 108,333
$
578
Dr Discount Expense $ 3,333
CR AOCI $ 3,333
Dr Foreign currency $ 95,000
CR A/R $ 95,000
22
Dr Cash
$ 105,000
Cr Foreign currency
$ 95,000
Cr Forward Contract
$ 10,000
(‫)متمم‬
Dr/ Moataz El Haddad
International Accounting
Chapter 2
Impact on Year 2 Net income:
Foreign exchange loss
Gain on forward contract
Net gain or loss
(5,000)
5,000
$0
Discount Expense
($ 3,333)
Impact on Net income =
($ 3,333)
B) FC Asset / Forward Contract / Exporter
Fair Value Hedge
Date
Dec. 1 , 2010
Dec. 31 , 2010
Original Contract
Forward Contract
Dr A/R
$ 110,000
CR Sales
$ 110,000
Dr Foreign exchange loss $ 10,000
Cr A/R
$ 10,000
Dr Forward Contract $ 8,911
Cr gain on forward contract $ 8,911
Fair Value of the
forward contract
Impact on Year 1 Net income:
Sales
Foreign exchange loss
Gain on forward contract
Net gain or loss
Impact on Net income =
$ 110,000
(10,000)
8,911
($ 1,089)
$ 108,911
The effect on Year 1 Balance Sheet:
Assets:
Accounts Receivable
($ 110,000 - $ 10,000)
Forward Contract
Grade Four
Liabilities:
$ 100,000
$ 8,911
Equity:
Retained Earnings
$ 108,911
$ 108,911
$ 108,911
23
Dr/ Moataz El Haddad
International Accounting
Date
March 2 , 2011
Fair Value for the
forward contract
Collection
Chapter 2
Original Contract
Forward Contract
Dr Foreign exchange loss $ 5,000
Cr A/R
$ 5,000
Dr Forward Contract $ 1,089
CR gain on forward contract $ 1,089
Dr Foreign currency $ 95,000
Dr Cash
$ 105,000
CR A/R $ 95,000
Cr Foreign currency
$ 95,000
Cr Forward Contract
$ 10,000
(‫)متمم‬
Impact on Year 2 Net income:
Foreign exchange loss
Gain on forward contract
Net gain or loss
(5,000)
1,089
($ 3,911)
Impact on Net income =
Grade Four
($ 3,911)
24
Dr/ Moataz El Haddad
International Accounting
Chapter 2
Final Chapter 2
Foreign Currency Transactions and Hedging
Foreign Exchange Risk
 Example 1:
 Suppose that on February 1, 2011, Joe Inc., a U.S. company (the seller) makes a sale
and ships goods to Jose SA, a Mexican customer, (the buyer). Sale price is $ 100,000
(U.S.). However, it is agreed that Jose (the buyer) will pay in Pesos (the Mexican
currency) on March 2, 2011.
 Assume the following spot rates :
Date
$ 0.10 per peso
$ 0.09 per peso
February 1, 2011
March 2 , 2011
Required:
1. How many Pesos does Jose agree to pay?
2. Record all Journal Entries for Joe Inc., to record the sale and the collection.
3. Record all Journal Entries for Jose Inc., to record the purchase and the payment.
Answer:
1. Jose agreed to pay 1,000,000 Pesos ($ 100,000 / $ 0.10).
Date
Feb. 1 , 2011
March 2 , 2011
2) Joe (Seller) in U.S $
Dr A/R
Cr Sales
Dr Cash
Dr FX LOSS
$ 100,000
$ 100,000
$ 90,000
$ 10,000
Cr A/R
$ 100,000
3) Jose (buyer) in Pesos
Dr Purchases
Cr A/P
Dr A/P
Cr Cash
1,000,000 P.
1,000,000 P.
1,000,000 P.
1,000,000 P.
Balance Sheet Date before Date of Payment:
The general consensus worldwide is that a foreign currency receivable or foreign
currency payable should be revalued at the balance sheet date to account for the
change in exchange rates.
Grade Four
25
Dr/ Moataz El Haddad
International Accounting
Chapter 2
Example 2:
Suppose that on December 1, 2010, Joe Inc., a U.S. company (the seller) makes a sale
and ships goods to Jose SA, a Mexican customer, (the buyer) for 1,000,000 pesos.
They agreed that Jose would pay in pesos on March 2, 2011.
The following spot rates for dollars and pesos are:
Date
December 1, 2010
$ 0.11 per peso
December 31, 2010
$ 0.105 per peso
March 2, 2011
$ 0.09 per peso
Required:
1- Prepare all required journal entries for Joe Inc., assuming the company closes its
books on Dec., 31 to prepare financial statements.
2- Prepare all required journal entries for Jose Inc., assuming the company closes its
books on Dec., 31 to prepare financial statements.

Answer:
Date
Dec. 1 , 2010
Dec. 31 , 2010
March 2, 2011
1) Joe (Seller) in U.S $
2) Jose (buyer) in Pesos
Dr A/R
Dr Purchases
Cr A/P
$ 110,000
Cr Sales
$ 110,000
Dr FX LOSS
$ 5,000
Cr A/R
$ 5,000
($ 105,000 - $ 110,000) = ($ 5,000)
Dr Cash
$ 90,000
Dr FX LOSS
$ 15,000
Cr A/R
$ 105,000
1,000,000 P.
1,000,000 P.
No Entry
Dr A/P
Cr Cash
1,000,000 P.
1,000,000 P.
----------------------------------------------------------------------------------------------------------------
Exercise 3:
 Suppose that on October 1, 2021, EGX Corp., an Egyptian company, makes a sale
and ships goods to Salamat SDN, a Malaysian customer, for $ 100,000. They agreed
that Salamat will pay in U.S $ on January 10, 2022.
 Assume the following spot rates :
Date
Spot rate
October 1 , 2021
December 31, 2021
January 10, 2022
1 $ = 40 EGP
1 $ = 50 EGP
1 $ = 45 EGP
Date
Spot rate
October 1 , 2021
1 $ = 5 Ringgit
December 31, 2021
1 $ = 6 Ringgit
January 10, 2022
1 $ = 4 Ringgit
Required:
1. Prepare all required journal entries for EGX Corporation.
2. Prepare all required journal entries for Salamat.
Grade Four
26
Dr/ Moataz El Haddad
International Accounting
Chapter 2
Answer:
Date
1) EGX (Seller) in EGP 2) Salamat (buyer) in Ringgit
Oct. 1 , 2021
Dec. 31 , 2021
January 10, 2022
Dr A/R
4,000,000 EGP
Cr Sales
4,000,000
Dr A/R
1,000,000
Cr FX Gains
1,000,000
Dr Purchases
Cr A/P
Dr FX loss
Cr A/P
(5,000,000 – 4,000,000)= 1,000,000
(500,000 – 600,000)= (100,000)
Dr A/P
600,000 R.
Cr FX Gains
200,000 R.
Cr Cash
400,000 R.
Dr Cash
4,500,000 EGP
Dr FX LOSS
500,000
Cr A/R
5,000,000 EGP
500,000 R.
500,000 R.
100,000
100,000
----------------------------------------------------------------------------------------------------------------
Exercise 4:
 Suppose that on October 1, 2021, EGX Corp., an Egyptian company, makes a sale
and ships goods to Salamat SDN, a Malaysian customer, for Ringgit 100,000. They
agreed that Salamat will pay in Ringgit in installments as follow:
 20,000 Ringgit to be paid on November 10, 2021
 The remaining to be paid on January 10, 2022.
 Assume the following spot rates:
Date
Spot rate
October 1 , 2021
November 10, 2021
December 31, 2021
January 10, 2022
1 Ringgit = 10 EGP
1 Ringgit = 11 EGP
1 Ringgit = 8 EGP
2 Ringgit = 9 EGP
Required: Prepare all required journal entries for EGX book.
Solution:
Oct. 1, 2021
Dr A/R (100,000 × 10)
EGP 1,000,000
Cr Sales Revenues
To record the sales for EGX on October 1, 2021
Nov. 10, 2022
EGP 1,000,000
Dr Cash (20,000 × 11)
EGP 220,000
Cr Foreign Exchange Gain
Cr A/R (20,000× 10)
To record the collection of 20,000 Ringgit for EGX
EGP 20,000
EGP 200,000
Dec. 31, 2021
Dr Foreign Exchange Loss
EGP 160,000
Cr A/R
EGP 160,000
To revalue the A/R on Dec. 31 (FV= 640,000 – BV= 800,000)
Jan. 10, 2022
Grade Four
Dr Cash (80,000 × 9)
EGP 720,000
Cr Foreign Exchange Gain
Cr A/R (80,000 × 8)
To record the collection of 80,000 Ringgit for EGX
27
EGP 80,000
EGP 640,000
Dr/ Moataz El Haddad
International Accounting
Grade Four
Chapter 2
28
Dr/ Moataz El Haddad