Chapter Ten
Foreign Currency
Transactions and
Hedging
Foreign Exchange Market:
The Biggest Market of All

An OTC market--not an organized
exchange such as the NYSE.

Open 24/7

$1.5 Trillion per day.

Market-makers: Several hundred banks
located throughout the world.
3
Trading Foreign Currencies
Spot Markets
 Transactions requiring immediate delivery of
foreign currency
Forward Markets
 Transactions involving delivery of the foreign
currency at a later date
Futures Markets
 Standardized contracts for future delivery trade
at futures rates
Foreign Exchange Markets




Each country uses its own
currency for internal
economic transactions.
To make transactions in
another country, units of that
country’s currency must be
acquired.
Exchange Rate --- cost of
obtaining other currencies
Measure of how much of one
currency can be exchanged
for another currency
Exchange Rate Mechanisms

Prior to 1973,
currency values were
generally fixed. The
US $ was based on
the Gold Standard.
 Since 1973, exchange
rates have been
allowed to fluctuate.
 Several valuation
models exist.
Foreign Exchange Rates
Published daily in the Wall
Street Journal.
 These are “end-of-day”
rates.
 As of 4:00pm Eastern time
Change constantly during
the day
Spread --- difference
between the rates at
which a bank is willing to
buy and sell a currency
7
Foreign Exchange Rates
Price of one unit of country’s currency
expressed in units of another country’s
currency
Expressed in two ways
 Indirect rate
 Amount of foreign currency that can be acquired per unit
of domestic currency
 Direct rate
 Amount of domestic currency needed to acquire one unit
of foreign currency
Direct rate is reciprocal of indirect rate.
Foreign Exchange Rates
As the relative strength
of a country’s economy
changes . . .
¥ = $?
. . . the exchange rate of
the local currency
relative to other
currencies also
fluctuates.
Currency Exchange
Terminology
Conversion: Going to the bank and
physically exchanging currencies.
for
Currency Exchange
Terminology
Translation:
Process of applying an
exchange rate to a foreign currency
amount so that an amount can be
expressed in dollars.
100 x $1.45296 = $145.30
Currency Exchange
Terminology
Directly:
(Domestic for Foreign)
$1.45296 =
$ .25
=
1
1 FC
Indirectly: (Foreign for Domestic)
.68825 = $ 1
4 FC = $ 1
Currency Exchange
Terminology
CUSTOM to express certain currencies
directly (British Pound):
1
= $1.45296
CUSTOM to express certain currencies
indirectly (Japanese Yen):
$1 = 89.9841
Currency Exchange
Terminology
FOREIGN CURRENCY STRENGTHENS (Gains):
Direct exchange rate goes UP.
Before:
After:
1
1
= $1.60
= $1.64
Indirect exchange rate goes DOWN.
Before:
After:
$1 = .625
$1 = .610
Currency Exchange
Terminology
Foreign Currency-- Strengthens:
It becomes more expensive to buy.
• Imports cost more.
• Exports cost foreign customers less.
Foreign Currency-- Weakens :
It becomes less expensive to buy.
• Imports cost less.
• Exports cost foreign customers more.
Foreign Exchange Rates
Spot Rate
Exchange rate that is
available today
Forward Rate
Exchange rate that can
be locked in today for
an expected future
exchange transaction.
Forward Exchange Rates
Exchange of currencies at a future (forward) point in time
Forward Contract--- agreement to exchange currencies at a future
date
Contract specifies the forward rate of exchange and the forward
date
Difference between a forward rate and the current spot rate
represents
Premium (Forward > Spot)
or
Discount (Forward < Spot)
Foreign Currency
Transaction
….transaction that requires
settlement in a foreign
currency
Translation Terminology
Denominated ---
Currency in
which an foreign exchange
transaction is to be settled.
Measured --- Currency in which
an foreign exchange transaction is
recorded in the books and records.
Exposure to Foreign Exchange
Risk
Occurs with purchases and sales:
When a U.S. exporter sells to a foreign
customer on credit
 A risk that the dollar equivalent of the future cash
receipt will change due to changes in the foreign
exchange rate
When a U.S. importer purchases goods from a
foreign supplier on credit
 A risk that the dollar equivalent of the future cash
payment varies as the foreign exchange rate
changes
19
20
Impact of Financial Risk due to
Changes in Exchange Rates
Can significantly impact the stability of a
company’s financial results
U.S. Dollars per unit of Foreign Currency:
Gains/Losses for Domestic
Company
No gain/loss for domestic company
that bills or has itself billed in its
domestic currency
Gain/Loss is possible if domestic
company bills or has itself billed in
foreign currency
22
Exchange Gains/Losses

Reported on the income statement
 Generated from two situations
U.S. Company
Dollar value of the
makes a credit sale
receivable changes
AND before the payment is
abroad, at a price
denominated in foreign
received and
currency units
converted into dollars
U.S. Company
Dollar value owed
purchases goods from
changes before the
abroad on account at a AND
U.S. company
price denominated in
converts dollars into
foreign currency units
foreign currency
Exchange
gain or loss
is
generated
Transactions --- Relevant
Dates
Order/Commitment Date:
Date the purchase
or sales order is issued.
Transaction Date:
Date that title passes and
the parties record the sale and purchase.
Intervening (F/R or B/S) Date:
Dates
between the transaction date and the settlement
date.
Settlement Date:
creditor.
Date that the debtor pays the
Foreign Currency
Transactions
The major accounting issue:
How do we account for the changes
in the value of the foreign currency?
Foreign Currency Transactions
FASB No. 52
Requires a two-transaction
perspective.
(1) Account for the original sale
in US $
(2) Account for gains/losses
from exchange rate
fluctuations.
Accounting Procedures for
Import/Export Transactions
Restate foreign current invoice price into dollars using
the appropriate foreign exchange spot rate Record
the transaction in dollars.
Record an exchange gain or loss if exchange rate
changes cause dollars to differ from original
transaction
If the transaction is not settled at balance sheet date,
record an exchange gain/loss by adjusting the
receivable/payable to its dollar equivalent using
the spot rate at the balance sheet date
26
Accounting for Import/Export
Transactions Example
On October 16, 2012, Gap Inc., purchased sweaters at an
invoice price of 17,000 New Zealand dollars (NZ$) from a New
Zealand manufacturer. The exchange rate was $0.62/NZ$.
Payment was to be made on December 16, 2012.
To record the purchase of sweaters from New Zealand:
$0.62 x 17,000 = $10,540
2012
Oct. 16
Inventories
Accounts payable
Initially recorded in U.S. Dollars
10,540
10,540
27
Accounting for Import/Export
Transactions Example
On December 16, 2012, Gap Inc. purchased NZ$17,000 at an
exchange rate of $0.63/NZ$ and transmitted the NZ$ to the
manufacturer’s bank in New Zealand.
Revalue the accounts payable to relect current exchange rate:
($0.63 – $0.62) × 17,000 = $170
2012
Dec. 16
Exchange loss
Accounts payable
170
170
Invest in sufficient foreign currency to pay the New Zealand
manufacturer: $0.63 × 17,000 = $10,710
Dec. 16
Foreign currency
Cash
10,710
10,710
Record payment of the liability to the New Zealand manufacturer:
Dec. 16
Accounts payable
Foreign currency
10,710
10,710
28
Accounting for Import/Export
Transactions Example
29
On December 20, 2012, Gap Inc., purchased scarves from a British
mill for ₤40,000 when the exchange rate was $2/₤. Payment is due
on February 20, 2013.
To record the purchase of scarves from the U.K.:
₤40,000 × 2 = $80,000
2012
Dec. 20
Inventories
Accounts payable
80,000
80,000
On December 22, 2012, Gap Inc., sold wool coats to a Canadian
company for 9,800 Canadian dollars (C$). The exchange rate was
$0.67/C$. Gap’s terms are 90 days, net.
To record the sale of coats to Canada:
$0.67 × 9,800 = $6,566
Dec. 22
Accounts receivable
Sales
6,566
6,566
Accounting for Import/Export
Transactions Example
On December 29, 2012, Gap Inc., purchased buttons from a
Mexican supplier for 10,000 pesos (P) when the exchange rate was
$0.05/P. A check was mailed immediately.
To record the cash purchase of buttons from Mexico:
$0.05 x 10,000 = $500
2012
Dec. 29
Inventories
Cash
500
500
30
Accounting for Import/Export
Transactions Year-End
Adjustments Example
On January 31, 2012, Gap Inc. made adjusting entries. Exchange
rates were $1.96/₤ and $0.685/C$.
To revalue the liability to the British mill to the current
exchange rates: ($2.00 – $1.96) × 40,000 = $1,600:
2012
Jan. 31 Accounts payable
Exchange gain
1,600
1,600
U.S. dollar strengthened
To revalue the receivable from Canada to the current
exchange rate: ($0.685 – $0.67) × 9,800 = $147
Jan. 31 Accounts receivable
Exchange gain
147
147
U.S. dollar weakened
31
Accounting for Import/Export
Transactions Example
On February 20, 2012, Gap Inc. paid its obligation to the British mill.
The exchange rate was $1.93/₤.
To revalue the liability to the British mill to the current exchange
rates: ($1.96 – $1.93) × 40,000 = $1,200:
2012
Feb. 20
Accounts payable
Exchange gain
1,200
1,200
To purchase sufficient foreign currency to pay the British mill:
$1.93 × 40,000 = $77,200
Feb. 20
Foreign currency
Cash
77,200
77,200
To record payment of the liability to the British mill:
Feb. 20
Accounts payable
Foreign currency
77,200
77,200
32
Accounting for Import/Export
Transactions Example
On March 20, 2012, payment was received from the Canadian
customer on the sale of the coats. The exchange rate was $0.65/C$.
To revalue the receivable to the current exchange rates:
($0.685 – $0.65) × 9,800 = $343
2012
Mar. 20
Exchange loss
Accounts receivable
343
343
To record receipt of foreign currency from Canada for receivable:
$0.65 × 9,800 = $6,370
Mar. 20
Foreign currency
Accounts receivable
6,370
6,370
To record exchange of the Canadian currency for U.S. dollars:
Mar. 20
Cash
Foreign currency
6,370
6,370
33
Effects of Changing Exchange Rates
on Receivables and Payables
Denominated in Foreign Currencies
Accounts Receivable (AR)
Exchange Gains and Losses
Due to Changes in Direct Exchange Rate
Increase
Decrease
($ Weakens)
($ Strengthens)
AR increases; gain
AR decreases; loss
Accounts Payable (AP)
AP increases; loss
Exposed Account
AP decreases; gain
Dollar values of sales revenue and inventory
purchase costs are not affected by changes
in the foreign exchange rate.
34
Essence of Hedging
Reducing exposure by
offsetting foreign currency
gains on assets/liabilities with
foreign currency losses and
visa versa
Hedging Foreign Exchange
Exposures

Importers and Borrowers
 Face risk that the direct exchange rate will rise
 Requires more dollars to purchase the foreign currency to
pay obligation

Exporters and Lenders
 Face risk that the direct exchange rate will fall
 Causing the receipt of fewer dollars on conversion than
the amount owed
Rates could also move in the company’s favor.
36
37
Types of Foreign Exchange Risk
Exposed Position
 Holding a receivable or payable
Firm Commitment
 Agreement to buy or sell merchandise in the future
Forecasted Transactions
 Buying or selling from/to foreign customers on a
recurring basis
Speculative Investments
 Deliberate exposures through forward contracts or
other instruments
Investments Used to Hedge
Forward Contracts
Foreign Currency Options
 Buy (call)
 Sell (put)
Foreign Currency Swaps
Accounting for Derivatives
SFAS 133/138 provides guidance for hedges
of four types of foreign exchange risk.
Recognized
foreign currency
denominated
assets &
liabilities.
Forecasted
foreign currency
denominated
transactions.
Unrecognized
foreign currency
firm
commitments.
Net investments
in foreign
operations
Derivative Instruments Used in
Hedging
Hedging
 A method of neutralizing risk by trading in the
forward, futures, or options markets
 Involves covering a foreign currency exposure by
contracting in the forward market to purchase or
sell foreign currency at a specified time in the
future for a fixed price
Removes the uncertainty involved in not
knowing how many dollars will be paid or
received
40
9-41
Determining the Value of
Derivatives
To determine the value of foreign
currency derivatives, the company
needs 3 basic pieces of
information:
(1) The forward rate when the forward
contract was entered into.
(2) The current forward rate for a
contract that matures on the same
date as the forward contract.
(3) A discount rate.
Accounting for Hedges
As the Fair Value of a Forward Contract
changes, gains or losses are recorded.
On 12/31/11, Bob has a forward
contract to deliver 500,000 ¥ to
Inuwashi Company on 1/31/12
at 120 ¥ = $1. The available 31day forward rate on 12/31/11 is
122.50 ¥ = $1.
Bob uses a discount rate of 6%.
What is the value of the
forward contract on 12/31/11
$-value of the
500,000ґ at the
currently available
forward rate
$-value of the
500,000ґ at the
contracted rate
Loss on Forward
Contract
?
The present value at
12/31/10
$
4,082
4,167
$
85
$
84.6110
Accounting for Hedges
There are two ways that a foreign currency
hedge can be accounted for.
Cash
Flow
Hedge
Gains/losses are
recorded to Other
Comprehensive Income
Fair
Value
Hedge
Gains/losses are
recorded to the Income
Statement
Now, let’s try a Fair Value
Hedge.
Fair Value Hedge - Date of
Transaction
On 12/1/11, Balloon Co., a U.S. balloon manufacturer
sells balloons to Maison Rue., a French company,
for 20,000 Euro’s (€) on credit. Payment is due in
90 days (March 1, 2012).
The current exchange rate is $.9700 = 1 €.
Prepare Balloon Co.’s journal entry.
BALLOON CO. GEN'L JOURNAL
Date
Dec
Description
1 A/R (€) (rounded)
Sales
Page
Debit
18
Credit
19,400
19,400
Fair Value Hedge - Date of
Transaction
Balloon Co buys a 90-day forward
contract to pay 20,000 €. Balloon
contracts for the 90-day forward rate
on 12/1/11 of $.9500 = 1 €.
BALLOON CO. GEN'L JOURNAL
Date
Description
Page
Debit
This is an executory contract, so
no entry is made on the contract
date.
18
Credit
Fair Value Hedge - Interim
Reporting Date
On 12/31/11, the value of the foreign currency
receivable must be adjusted based on the
12/31/11 spot rate of $.9650 = 1 €.
 Adjust the original receivable:
BALLOON CO. GEN'L JOURNAL
Date
Description
Dec. 31 Foreign Exchange Loss
Accounts Receivable (€)
20,000 x .9650 = $19,300
$19,400 - $19,300 = 100
Page
Debit
25
Credit
100.00
100.00
Fair Value Hedge - Interim
Reporting Date
Also, on 12/31/11, the forward contract must be
recorded. The available forward rate to
March 1, 2012 is $.9520 = 1 €. Balloon uses a
6% discount rate.
 Record the forward contract:
BALLOON CO. GEN'L JOURNAL
BALLOON
CO. GEN'L JOURNAL
Date
Date
Description
Description
Dec. 31 Loss on Forward Contract
Forward Contract
At the 60-Day Rate = $19,040
At the Contract Rate = $19,000
PV factor = .9901
Page
Page
Debit
Debit
25
25
Credit
Credit
39.60
39.60
Fair Value Hedge - Date of
Collection
On 3/1/12, both the original receivable
and the forward contract come due.
The 3/1/12 exchange rate is $.9540 = 1 €.
Adjust the Accounts Receivable:
BALLOON CO. GEN'L JOURNAL
Date
Mar
Description
1 Foreign Exchange Loss
Accounts Receivable
20,000 x .9540 = $19,080
$19,300 - $19,080 = $220
Page
Debit
40
Credit
220
220
Fair Value Hedge - Date of
Collection
On 3/1/12, both the original receivable and the
forward contract come due. The 3/1/12
exchange rate is $.9540 = 1 €.
 Adjust the Forward Contract Payable:
BALLOON
CO.
GEN'L
JOURNAL
BALLOON
CO.
GEN'L
JOURNAL
Date
Date
Mar
1
Description
Description
Loss on Forward Contract
Forward Contract
At the Spot Rate = $19,080
At the Contract Rate = $19,000
Forward Contract on 12/31 = 39.60
Page
Page 4040
Debit
Debit
Credit
Credit
40.40
40.40
Fair Value Hedge - Date of
Collection
On 3/1/12, both the original receivable and the
forward contract come due. The 3/1/12
exchange rate is $.9540 = 1 €.
Collect the 20,000 € in settlement of the
Account Receivable:
BALLOON CO. GEN'L JOURNAL
Date
Mar
Description
1 Foreign Currency (€)
Accounts Receivable (€)
Page
Debit
40
Credit
19,080
19,080
Fair Value Hedge - Date of
Collection
On 3/1/12, both the original receivable and the
forward contract come due. The 3/1/12
exchange rate is $.9540 = 1 €.
Complete the Forward Contract:
BALLOON
CO.
GEN'L
JOURNAL
BALLOON
CO.
GEN'L
JOURNAL
Date
Date
Mar
1
Description
Description
Cash ($)
Forward Contract
Foreign Currency (Ū)
Page
Page 4040
Debit
Debit
Credit
Credit
19,000
80
19,080
Foreign Exchange Forward
Contracts
A forward contract requires the purchase of currency
units at a future date at the contracted exchange rate.
This forward contract
allows us to purchase
1,000,000 ¥ at a price
of $.0080 US in 30
days.
But if the spot rate is
$.0069 US in 30 days,
we still have to pay
$.0080 US and we
lose $1,100!
Foreign Exchange Options
Contracts
An options contract gives the holder the option of
buying the currency units at a future date at the
contracted “strike” price.
An alternative is an
option contract to
purchase 1,000,000 ¥
at $.0080 US in 30
days. But it costs
$.00002 per ¥.
That way, if the spot
rate is $.0069 in 30
days, we only lose
the $20 cost of the
option contract!
Using a Foreign Currency Option
as a Hedge
As with forward contracts,
options can be designed
as cash flow hedges or fair
value hedges.
Option prices are
determined using the
Black-Scholes Option
Pricing Model
9-56
Option values

Derived from a function combining:
 The difference between current spot rate
and strike price
 The difference between foreign and
domestic interest rates
 The length of time to option expiration
 The potential volatility of changes in the
spot rate
Using a Foreign Currency Option
as a Hedge
SFAS 133 requires options
be carried at fair value on
the balance sheet.
Option fair values are
determined by examining
the current quotes for
similar options and
breaking the fair value into
two components:
Intrinsic Value & Time
Value
Hedge of a Foreign Currency
Firm Commitment
Occurs when a company hedges a
transaction that has yet to take place.
Example
Ruff Wood orders
1,000,000 board feet
of lumber from Brazil.
Ruff Wood enters the
hedge contract on the
same day as the order
is placed.
Under fair value hedge
accounting:
(1) The gain/loss on the hedge is
recognized currently in net income.
(2) The gain/loss on the firm
commitment attributable to the
hedged risk is also recognized
currently in net income.
Foreign Currency Firm
Commitment
On December 1, 2011, Amerco receives an
order from a German customer. The
delivery date is March 1, 2012, when
Amerco will receive immediate payment.
The sale is three months away, Amerco has
a firm commitment to make the sale and
receive payment of 1,000,000 €.
Amerco decides to hedge this commitment.
Amerco General Journal
Date
Description
Page
Debit
These are executory contracts, so
no entries are made on this date.
18
Credit
Foreign Currency Firm
Commitment - Example
Amerco will receive 1,000,000 € on March 1,
2012. A forward contract was entered
into to sell the euros at a price of $.905 =
1 €. Amerco’s discount rate is 12%.
On 12/31/11, the currently available forward
rate is $.916 = 1 €.
1. Record the forward contract.
Amerco General Journal
Date
Description
Page
Debit
18
Credit
Foreign Currency Firm
Commitment
1,000,000 Ы @ the contract rate of $.905
$
905,000
1,000,000 Ы @ the currently available forward rate of $.916 $
916,000
Difference attributed to loss on forward contract
(11,000)
$
Time value factor at the discount rate of 12%
12/31/09 fair value of the forward contract.
Amerco General Journal
Date
Description
Dec 31 Loss on Forward Contract
Forward Contract
0.9803
$
Page
Debit
(10,783)
18
Credit
10,783
10,783
Foreign Currency Firm
Commitment
Amerco will receive 1,000,000 € on March 1,
2012. A forward contract was entered
into to sell the euros at a price of $.905 =
1 €. Amerco’s discount rate is 12%.
On 12/31/11, the currently available forward
rate is $.916 = 1 €.
2. Record the firm commitment.
Amerco General Journal
Date
Dec
Description
31 Firm Commitment
Gain on Firm Commitment
Note that this entry effectively
offsets the loss on the forward
contract.
Page
Debit
18
Credit
10,783
10,783
Foreign Currency Firm
Commitment
On March 1, 2012, Amerco receives
1,000,000 € from the German customer
upon deliver of the order. On 3/1/12, the
spot rate is $.900 = 1 €.
1. Adjust the forward contract to its
current value of $5,000.
Amerco General Journal
Date
Mar
Description
1 Forward Contract
Gain on Forward Contract
Page
Debit
18
Credit
15,783
15,783
Foreign Currency Firm
Commitment
On March 1, 2012, Amerco receives
1,000,000 € from the German customer
upon deliver of the order. On 3/1/12, the
spot rate is $.900 = 1 €.
Record an offsetting loss associated
with the Firm Commitment.
Amerco General Journal
Amerco
General Journal
Date
Description
Date
Mar
Description
1 Loss on Firm Commitment
Firm Commitment
Note that the balance in the Firm
Commitment is now $5,000 CR.
Page
Page
Debit
Debit
18
18Credit
Credit
15,783
15,783
Foreign Currency Firm
Commitment
On March 1, 2012, Amerco receives
1,000,000 € from the German customer
upon deliver of the order. On 3/1/12, the
spot rate is $.900 = 1 €.
Record the receipt of the foreign
currency.
Amerco General Journal
Date
Mar
Description
1 Foreign Currency (€)
Sales
Page
Debit
18
Credit
900,000
900,000
Foreign Currency Firm
Commitment
On March 1, 2012, Amerco receives
1,000,000 € from the German customer
upon deliver of the order. On 3/1/12, the
spot rate is $.900 = 1 €.
Record the fulfilling of the forward
contract.
Amerco General Journal
Date
Mar
Description
1 Cash
Forward Contract
Foreign Currency
Page
Debit
18
Credit
905,000
5,000
900,000
Foreign Currency Firm
Commitment
On March 1, 2012, Amerco receives 1,000,000
€ from the German customer upon deliver
of the order. On 3/1/12, the spot rate is
$.900 = 1 €.
Close the Firm Commitment to Net
Income.
Amerco
Amerco General
General Journal
Journal
Date
Date
Mar
Description
Description
1 Firm Commitment
Adjustment to Net Income
Page
Page
Debit
Debit
18
18
Credit
Credit
5,000
5,000
Let’s try a Cash Flow Hedge
Example
Cash Flow Hedge - Date of
Transaction
On 4/1/12, MPG, Inc., a U.S. maker of auto parts, purchases
parts from Aguila Company in Mexico 100,000 Pesos on
credit. Payment is due in 180 days (October 8, 2012).
The current exchange rate is $1 = 9.5000 pesos.
Prepare MPG’s journal entry on 4/1/12.
MPG, Inc. General Journal
MPG, Inc. General Journal
Date
Date
Apr
1
Description
Description
Purchases
A/P
Amount Rounded
Page
Page
Debit
Debit
18
18
Credit
Credit
10,526
10,526
Cash Flow Hedge - Date of
Transaction
Assume that MPG takes a 180-day forward
contract to buy 100,000 pesos. Forward
Contract rate is 9.7400 pesos = $1.
MPG, Inc. General Journal
Date
Description
Page
Debit
This is an executory contract, so
no entry is made on the contract
date.
18
Credit
Cash Flow Hedge - Interim
Reporting Date
At MPG’s year-end, 6/30/12, the value of the foreign
currency payable must be re-measured, or
adjusted, based on the 6/30/12 spot rate of $1 =
9.5250 pesos.
Remeasure the original payable:
MPG,Inc.
Inc. General
General Journal
MPG,
Journal
Date
Date
Description
Description
Jun 30 A/P (pesos)
Foreign Exchange Gain
100,000 ÷ 9.525 = $10,499
$10,526 - $10,499 = 27
Amounts Rounded
Page
Page 2525
Debit
Debit Credit
Credit
27.00
27.00
Cash Flow Hedge - Interim
Reporting Date
In addition, we record an entry to Other
Comprehensive Income (OCI) to offset
the exchange gain/loss associated with
the original transaction.
MPG, Inc. General Journal
MPG,
Inc. General Journal
Date
Date
Description
Description
Jun 30 Foreign Exchange Loss
OCI
Page
Page
Debit
Debit
25
25
Credit
Credit
27.00
27.00
Cash Flow Hedge - Interim
Reporting Date
Also, on 6/30/12, the forward contract must be
recorded. The available forward rate to October 8,
2012 is $1 = 9.6200 pesos. MPG uses a 6%
discount rate.
Record the forward contract:
MPG, Inc. General Journal
MPG,
Inc. General Journal
Date
Date
Description
Description
Jun 30 Forward Contract
OCI
At the 90-Day Rate = $10,395
At the Contract Rate = $10,267
PV factor = .9851
Page
Page
Debit
Debit
25
25
Credit
Credit
126.09
126.09
9-74
Cash Flow Hedge - Date of
Collection Example
Finally, MPG must amortize the rest of the
discount from the original transaction date.
In the original transaction, MPG had a
discount of $259 ($10,526 - $10,267). The
discount is amortized using the straightline method.
MPG, General
Inc. General
Journal
MPG's
Journal
Date
Date
Description
Description
June 30 OCI
Page
Page
Debit
Debit
25
Credit
Credit
129.50
Discount Revenue
129.50
Cash Flow Hedge - Date of
Collection
On 10/8/12, both the original payable and the exchange
contract come due. The 10/8/12 exchange rate is $1
= 9.4000 pesos.
Remeasure the Accounts Payable:
MPG, Inc. General Journal
Date
Oct
Description
8 Foreign Exchange Loss
Accounts Payable
100,000 ÷ 9.4000 = $10,638
$10,638 - $10,499 = $139
Page
Debit
40
Credit
139
139
Cash Flow Hedge - Date of
Collection
As at year-end, MPG must record an
entry to offset the foreign exchange
loss of $139.
MPG, Inc. General Journal
MPG,
Inc. General Journal
Date
Date
Oct
Description
Description
8 OCI
Foreign Exchange Gain
Page
Page
Debit
Debit
25
25
Credit
Credit
139
139
Cash Flow Hedge - Date of
Collection Example
On 10/8/12, both the original payable and the exchange
contract come due. The 10/8/12 exchange rate is $1 =
9.4000 pesos. .
Adjust the Forward Contract:
MPG,
General
Journal
MPG,
Inc.Inc.
General
Journal
Date
Date
Oct
Description
Description
Page
Page 2525
Debit
Debit
8 Forward Contract
244.91
OCI
At the Current Rate = $10,638
At the Contract Rate = $10,267
Current Forward Contract $126.09 + 244.91=371
Credit
Credit
244.91
9-78
Cash Flow Hedge - Date of
Collection Example
Finally, MPG must amortize the rest of the
discount from the original transaction date.
In the original transaction, MPG had a
discount of $259 ($10,526 - $10,267). The
discount is amortized using the straightline method.
MPG,
General
Journal
MPGsInc.
General
Journal
Date
Date
Oct
Description
Description
8 OCI
Discount Revenue
Page
25
Page 25
Debit
Credit
Debit
Credit
129.50
129.50
Cash Flow Hedge - Date of
Collection
On 10/8/12, both the original payable and the
exchange contract come due. The 10/8/12
exchange rate is $1 = 9.4000 pesos.
Purchase the 100,000 pesos:
MPG, Inc. General Journal
Date
Oct
Description
8 Foreign Currency (pesos)
Cash
Page
Debit
40
Credit
10,267
10,267
Cash Flow Hedge - Date of
Collection
On 10/8/12, both the original payable and the exchange
contract come due. The 10/8/12 exchange rate is $1
= 9.4000 pesos.
Complete the Forward Contract Payable:
MPG, Inc. General Journal
Date
Oct
Description
8 A/P (pesos)
Forward Contract
Foreign Currency (€)
Page
Debit
40
Credit
10,638
371
10,267
The End . . .
. . . sort of