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1) Johnson Corporation (a U.S.

company) began operations on December 1, 2010, when the owner contributed $100,000 of his own money to establish the business. Johnson then had the following import and export transactions with unaffiliated Mexican companies: December 12, 2011 Bought inventory for 150,000 pesos on account. Invoice denominated in pesos. December 15, 2011 Sold 60% of inventory acquired on 12/12/11 for 120,000 pesos on account. Invoice denominated in pesos. January 1, 2012 Acquired and paid the 150,000 pesos owed to the Mexican supplier

January 15, 2012 Collected the 120,000 pesos from the Mexican customer and immediately converted them into U.S. dollars The following exchange rates apply: Date Rate December 12 $.11 = 1 peso December 15 $.12 = 1 peso December 31 $.13 = 1 peso January 1 $.14 = 1 peso January 15 $.15 = 1 peso Required: 1. What were Sales in the income statement for the year ended December 31, 2011? 2. What was the COGS associated with these sales? 3. What is the Accounts Payable balance in the balance sheet at December 31, 2011? 4. What is the Inventory balance in the balance sheet at December 31, 2011? Answer: 1. Sales = December 15 sale of 120,000 pesos at $.12 / peso = $14,400 2. COGS = 60% of inventory balance purchased 12/12/11 = 150,000 pesos $.11 = $16,500 60% = $9,900 3. Accounts Payable balance = 150,000 pesos $.13 = $19,500 4. Inventory balance = 150,000 pesos x $.11 = $16,500 40% remaining after sale = $6,600 Objective: LO5 Difficulty: Difficult 2) Black Corporation (a U.S. company) began operations on January 1, 2011, when common stock was issued for $2,500,000. In the first two months of operations, Black had the following transactions: January 15, 2011 Bought inventory for 1000,000 Mexican pesos on account January 26, 2011 Sold 70% of inventory acquired on 1/15/11 for 440,000 Saudi riyals on account January 27, 2011 Paid $10,000 in other operating expenses February 2, 2011 Sold additional inventory that cost $10,000 for $30,000 cash to a U.S. company. February 15, 2011Acquired and paid the 1,000,000 pesos owed to the Mexican supplier

February 21, 2011Paid $15,000 in other operating expenses February 28, 2011Collected the 440,000 riyals from the Saudi customer and immediately converted them into U.S. dollars The following exchange rates apply: Date Rate January 15 $.11 = 1 peso January 26 $.12 = 1 peso January 31 $.13 = 1 peso February 15 $.14 = 1 peso February 28 $.15 = 1 peso Rate $.23 = 1 riyal $.24 = 1 riyal $.25 = 1 riyal $.26 = 1 riyal $.27 = 1 riyal

Required: Complete the summary income statement and balance sheet for the month ended January 31, 2011 and February 28, 2011, assuming there were no other transactions. January 31 INCOME STATEMENT Sales COGS Gross Margin Other Operating Expenses Exchange Gain / (Loss) Net Income February 28

BALANCE SHEET Cash Accounts Receivable Inventory Total Assets

Accounts Payable Common Stock

Retained Earnings Total Liab and Equity Answer: January 31 INCOME STATEMENT Sales COGS Gross Margin Other Operating Expenses Exchange Gain / (Loss) Net Income 105,600 (77,000) 28,600 (10,000) (15,600) 3,000 30,000 (10,000) 20,000 (15,000) (1,200) 3,800 February 28

BALANCE SHEET Cash Accounts Receivable Inventory Total Assets 2,490,000 110,000 33,000 2,633,000 2,483,800 -023,000 2,506,800

Accounts Payable Common Stock Retained Earnings Total Liab and Equity Objective: LO5 Difficulty: Difficult

130,000 2,500,000 3,000 2,633,000

-02,500,000 6,800 2,506,800

3) Plymouth Corporation (a U.S. company) began operations on September 1, 2011, when the owner

borrowed $250,000 to establish the business. Plymouth then had the following import and export transactions with unaffiliated Chinese companies: September 6, 2011 Bought material inventory for 100,000 yuan on account. Invoice denominated in yuan. September 18, 2011 Sold 80% of inventory acquired on 9/6/11 for 110,000 yuan on account. Invoice denominated in yuan. October 5, 2011 Acquired and paid the 100,000 yuan owed to the Chinese supplier October 18, 2011 Collected the 110,000 yuan from the Chinese customer and immediately converted them into U.S. dollars The following exchange rates apply: Date Rate September 6 $0.1544 = 1 yuan September 18 $0.1607 = 1 yuan September 30 $0.1591 = 1 yuan October 5 $0.1578 = 1 yuan October 18 $0.1593 = 1 yuan Required: 1. What were Sales in the September month-end income statement? 2. What was the COGS associated with these sales? 3. What is the Accounts Receivable balance in the balance sheet at September 30, 2011? 4. What is the Inventory balance in the balance sheet at September 30, 2011? 5. What is the Exchange gain or loss that will be reported for the month of September? Answer: 1. Sales = September 18 sale of 110,000 yuan at $.1607 / yuan = $17,677 2. COGS = 80% of inventory balance purchased 9/6/11 = 100,000 yuan $.1544 = $15,440 80% = $12,352 3. Accounts Receivable balance = 110,000 yuan $.1591 = $17,501 4. Inventory balance = 100,000 yuan $.1544 = $15,440 20% remaining after sale = $3,088 5. Exchange Gain / (Loss) in September = A/R = 110,000 yuan ($.1591 - $.1607) = ($176) Loss A/P = 100,000 yuan ($.1591 - $.1544) = ($470) Loss $176 Loss + 470 Loss = ($646) Net Loss in September Objective: LO5 Difficulty: Difficult 4) Charin Corporation, a U.S. corporation, imports and exports small electronics. On December 1, 2011, Charin purchased components from an Egyptian manufacturer amounting to 500,000 Egyptian pounds. The purchase is payable in Egyptian pounds. At December 30, Charin wanted to take advantage of favorable exchange rates, but did not have the full amount required to pay off the entire amount. Charin wired the funds to pay off half of the balance owed, and expected to pay the remaining balance on January 3, 2012. Charin paid the remaining balance on January 3, 2012. The respective exchange rates were as follows: December 1, 2011 1 pound = $.170

December 30, 2011 1 pound = $.165 December 31, 2011 1 pound = $.175 January 3, 2012 1 pound = $.180 Required: Document the journal entries related to these transactions for the four dates shown. If no entry is required, record "no entry." Answer: Charin's General Journal Date 12/1/11 12/30/11 12/30/11 Account Name Inventory Accounts Payable (pound) Cash (pound) Cash Accounts Payable (pound) Exchange Gain Cash (pound) (250,000 pounds ($.165 - $.170)) Exchange Loss Accounts Payable (pound) (250,000 pounds ($.175 - $.17)) Cash (pound) Cash Debit 85,000 41,250 41,250 42,500 1,250 41,250 1,250 1,250 45,000 45,000 43,750 1,250 45,000 Credit 85,000

12/31/11

01/3/12 01/3/12

Accounts Payable (pound) Exchange Loss Cash (pound) (250,000 pounds $0.180) Objective: LO5 Difficulty: Difficult

5) Meric Corporation (a U.S. company) began operations on January 1, 2011, when the owner borrowed $150,000 to start the company. In the first month of operations, Meric had the following transactions: January 3, 2011 Bought inventory for 100,000 Brazilian real on account. Must be paid with Brazilian real.

January 8, 2011 Sold 60% of inventory acquired on 1/3/11 for 32,000 British pounds on account. Invoice denominated in British pounds. January 10, 2011 January 23, 2011 Paid $3,000 in other operating expenses Acquired and paid half of the Brazilian real owed to the Brazilian supplier

January 28, 2011 Collected half of the 32,000 pounds from the customer in Great Britain and immediately converted them into U.S. dollars

The following exchange rates apply: Date Rate January 3 $.6260 = 1 real January 8 $.6230 = 1 real January 10 $.6210 = 1 real January 23 $.6250 = 1 real January 28 $.6330 = 1 real January 31 $.6180 = 1 real

Rate $1.5950 = 1 pound $1.5760 = 1 pound $1.5880 = 1 pound $1.5610 = 1 pound $1.5570 = 1 pound $1.5720 = 1 pound

Required: Complete the summary income statement and balance sheet for the month ended January 31, 2011 assuming there were no other transactions. January 31 INCOME STATEMENT Sales COGS Gross Margin Other Operating Expenses Exchange Gain / (Loss) Net Income BALANCE SHEET Cash Accounts Receivable Inventory Total Assets Accounts Payable Debt Retained Earnings Total Liab and Equity Answer: January 31 INCOME STATEMENT Sales COGS Gross Margin Other Operating Expenses Exchange Gain / (Loss) Net Income BALANCE SHEET Cash Accounts Receivable Inventory Total Assets Accounts Payable 50,432 (37,560) 12,872 (3,000) 82 9,954

140,662 25,152 25,040 190,854 30,900

Debt Retained Earnings Total Liab and Equity Objective: LO5 Difficulty: Difficult

150,000 9,954 190,854

6) On June 1, 2011, Puzzle Industries purchases an option contract for $5,000 on 10,000 gallons of aviation gas to minimize its purchasing cost price exposure. At the time, the market price is $2.50 per gallon and the option price of $2 per gallon will expire 6 months later. Puzzle can exercise the option at its discretion. When Puzzle prepares quarterly reports on June 30, Puzzle is still holding the option. On June 30, the market price of aviation gas is $4.50 per gallon. The option is to be settled net. On August 1, Puzzle exercises the option when the gas market price is $5.00 per gallon and purchases 40,000 gallons of gas. On August 15, Puzzle uses all of the gas on a charter flight. Required: What are Puzzle's journal entries with regard to the aviation gas option? Assume this is a cash flow hedge. Ignore the time value of money. Answer: Puzzle's General Journal 6/01/11Aviation gas contract option Cash 6/30/11Aviation gas contract option Other comprehensive income (($4.50-$2.00) 10,000 gallons = fair value debit balance of $25,000; unadjusted debit balance = $5,000 from June 1 entry.) 5,000 5,000 20,000 20,000

8/01/11Cash 30,000 Aviation gas contract option 25,000 Other comprehensive income 5,000 (Net settlement = ($5 - $2) 10,000 gallons = $30,000 received) Aviation gas inventory Cash (40,000 gallons $5 per gallon) 8/15/11Cost of goods sold Aviation gas inventory Other comprehensive income Cost of goods sold Objective: LO3 Difficulty: Difficult 200,000 200,000 200,000 200,000 25,000 25,000

7) On November 1, 2011, Moddel Company (a U.S. corporation) entered into a 90-day forward contract to purchase 200,000 British pounds. The purpose of the forward contract is to hedge a commitment to

purchase special equipment on January 30, 2012 from a British firm Jeckyl Inc. The invoice price on the purchase commitment is denominated in British pounds. The forward contract is not settled net. Assume Moddel uses a 12% interest rate. Use a fair value hedge. The relevant exchange rates are stated in dollars per pound: Forward Rate Spot Rate to Jan. 30, 2012 November 1, 2011 $1.32 $1.35 December 31, 2011 $1.47 $1.50 January 30, 2012 $1.55 Required: 1.What journal entry did Moddel record on November 1, 2011? 2.What journal entries did Moddel record on December 31, 2011? 3.What journal entries did Moddel record on January 30, 2012 if the purchase was made? Answer: 11/01/11 Contract receivable (pounds) 270,000 Contract payable 270,000 (200,000 $1.35) 12/31/11 Contract receivable (pounds) Exchange gain 200,000 ($1.50 - $1.35) Exchange loss Change in value of firm commitment in pounds 200,000 ($1.50 - $1.35) 01/30/12 Exchange loss Change in value of firm commitment in pounds 200,000 ($1.55 - $1.50) Contract receivable (pounds) Exchange gain 200,000 ($1.55 - $1.50) Contract payable Cash Cash (pounds) 200,000 $1.55 Contract receivable (pounds) Equipment Change in value of firm commitment in pounds Accounts payable (pounds) Accounts payable (pounds) Cash (pounds) 30,000 30,000 30,000 30,000 10,000 10,000 10,000 10,000 270,000 270,000 310,000 310,000 270,000 40,000 310,000 310,000 310,000

Objective: LO3 Difficulty: Difficult 8) Texas, Incorporated (a U.S. corporation) sold inventory to a company in the Philippines for 1,600,000 pesos on account on February 1, 2011, with payment expected in 90 days. Texas entered into a forward contract to hedge this transaction, and properly accounts for the transaction as a cash flow hedge. Texas has a March 31 fiscal year end, and uses an 8% discount rate, resulting in a 30-day present value factor of .9934. The forward contract is settled net. The relevant exchange rates are shown below: Forward Rate to May 2, 2011 $0.0270 = 1 peso $0.0268 = 1 peso $0.0280 = 1 peso

Spot Rate February 1, 2011 March 31, 2011 May 2, 2011 $0.0229 = 1 peso $0.0254 = 1 peso $0.0280 = 1 peso

Required: Record the journal entries needed by Texas on February 1, March 31, and May 2. Round all entries to the nearest whole dollar. Answer: 2/1/11 Accounts receivable (peso) 36,640 Sales 36,640 (1,600,000 0.0229) 3/31/11 Accounts receivable (peso) Exchange gain (1,600,000 (0.0254 - 0.0229)) Forward contract Other comprehensive income 4,000 4,000 318 318 $42,880 43,200 320 .9934 $ 318 4,000 4,252 4,252

Current forward rate: 1,600,000 pesos $0.0268 Contracted forward rate: 1,600,000 pesos $0.0270 Net change in value PV for 30 days @ 6% Fair value of forward contract on 3/31/11 Exchange loss Other comprehensive income Other comprehensive income Exchange gain Discount rate = 0.00056435% per month $2,068 + $2,184= $4,252 $2,068 = 0.056435 $36,640 4,000

$2,184 = [0.056435 ($36,640 + $2,068)] 05/02/11 Accounts receivable (peso) Exchange gain (1,600,000 (0.0280-0.0254)) Exchange loss Other comprehensive income Other comprehensive income Exchange gain ($36,640 + $4,252) 0.056435 = 2,308 Other comprehensive income Forward contract 4,160 4,160 4,160 4,160 2,308 2,308 1,918 1,918 $ 44,800 43,200 1,600 318 1,918 44,800 1,600 1,600

Current forward rate: 1,600,000 pesos $0.0280 Contracted forward rate: 1,600,000 pesos $0.0270 Net change in value Add amount previously recorded Cash (peso) Accounts receivable (peso) (1,600,000 0.028) Forward contract Cash Objective: LO4 Difficulty: Difficult 44,800

9) On December 15, 2011, Electronix Company purchased inventory from a foreign supplier for 2,000,000 foreign currency units (fcu's). Payment will be made on February 13, 2012. On December 15, 2011, to hedge the transaction, Electronix signed a forward contract to buy 2,000,000 fcu's in 60 days. Electronix uses a discount rate of 5% resulting in a 45-day present value factor of .9938. The forward contract will be settled net. The related exchange rates are shown below: Forward Rate to 2/13/12 $0.010 = 1 fcu $0.011 = 1 fcu $0.013 = 1 fcu

Spot Rate December 15, 2011 December 31, 2011 February 13, 2012 $0.010 = 1 fcu $0.012 = 1 fcu $0.013 = 1 fcu

On December 15, 2011, Electronix recorded a debit to Inventory and a credit to Accounts Payable (fcu) for $20,000, using the current spot rate.

Required: 1. Show the required entries on December 31, 2011 if the hedge is a cash flow hedge. Round to the nearest whole dollar. 2. Show the required entries on December 31, 2011 if the hedge is a fair value hedge. Round to the nearest whole dollar. Answer: 1. Year-end entriesCash flow hedge: Exchange loss 4,000 Accounts payable (fcu) 4,000 (2,000,000 (.012 - .010)) Forward contract Other comprehensive income Current forward rate: 2,000,000 fcu $.011 Contracted forward rate: 2,000,000 fcu $.01 Net change in value PV for 45 days @ 5% Fair value of forward contract on 12/31/11 Other comprehensive income Exchange gain 2. Year-end entries - Fair value hedge: Exchange loss Accounts payable (fcu) Forward contract Gain on forward contract Objective: LO3 Difficulty: Difficult 4,000 4,000 4,000 4,000 1,988 1,988 1,988 1,988 $ 22,000 20,000 2,000 .9938 $ 1,988

10) On January 1, 2011, Bosna borrowed $100,000 from Lenda. The three-year term note carries a variable rate interest, based on LIBOR, and interest is payable at December 31 of each year, compounded annually. The first year's rate of interest is 7% and Bosna would like to assure that their rate does not increase. Bosna enters into a pay-fixed, receive-variable interest rate swap agreement with Swamp City Bank, under which Bosna will pay 7%, fixed. At December 31, 2011, it is determined that Bosna's interest rate to Lenda for 2012 will be 6%. At December 31, 2012, the interest rate for 2013 was determined to be 8%. Treat as a cash flow hedge. Required: Determine the estimated fair value of the hedge at December 31, 2011, and prepare the related journal entries required to document this hedge and the related interest payments at December 31, 2011, 2012, and 2013, including final repayment on 12/31/13. Assume a flat interest rate curve. Answer: 12/31/11: Fair value of swap = PV of estimated future net payments: Estimated payment based on 12/31/11 rate Present Factor

Date of payment

Value

12/31/12 12/31/13 Total 12/31/11

.01 $100,000 .01 $100,000 Other comprehensive income Interest rate swap Interest Expense Cash

1/(1.06) 1/(1.06)2 1,833

$943 890 $1,833 1,833

7,000 7,000

12/31/12: Fair value of swap = PV of estimated future net payments: Estimated payment based on 12/31/11 rate .01 $100,000 Present Value $ 926 6,000 1,000 1,000 2,759 2,759 8,000 8,000 1,000 1,000 926 926 100,000 100,000

Date of payment 12/31/13 12/31/12

Factor 1/(1.08) 6,000

Interest Expense Cash Interest Expense Cash Interest rate swap Other Comprehensive Income

12/31/13

Interest Expense Cash Cash Interest Expense Other Comprehensive Income Interest rate swap

Loan Payable Cash Objective: LO3 Difficulty: Difficult

11) Opie Industries is a manufacturer of plastic bottles. On September 1, 2011, Opie purchased an option contract at a cost of $2,000. The purpose of the option is to hedge against increases in the price of this type of plastic, "PET." The option is to buy 1,000,000 pounds of PET on March 1, 2012 for $.75 per pound. If the market price of PET is below $.75 on March 1, Opie will let the option expire. If the market price is above $.75, then Opie will exercise the option. The option is to be settled net. Opie assumes a 6% annual borrowing rate. Assume this is a cash flow hedge. Required: Prepare the entry that Opie should record on September 1, 2011. Then, assuming that the price of PET is $.72 on December 31, 2011 (Opie's year end), prepare the entry that Opie should record. Finally, prepare the entries for March 1, 2012, assuming that the price of PET is $.78.

Answer: 9/1/11 12/31/11

PET Contract Option Cash

2,000 2,000 2,000

Other comprehensive income 2,000 PET Contract Option (The option has no value because the market price is below the exercise price.) PET Contract Option 30,000 Other comprehensive income [1,000,000 ($0.78 - $0.75)]=30,000 PET Inventory Cash 780,000

3/1/12

30,000

3/1/12

780,000 30,000 30,000

Cash PET Contract Option Objective: LO2 Difficulty: Difficult

12) Bronn Company purchased all the outstanding stock of Leather Company (a manufacturing company in Argentina) when the book value of Leather's net assets equaled their fair value. Leather's summarized balance sheet is shown below on January 1, 2011, the date of acquisition, and on December 31, 2011, when the exchange rates were $.25 and $.20, respectively. The average exchange rate for 2011 was $.23, and Leather paid dividends in 2011 amounting to 300,000 pesos when the exchange rate was $.21. December 31, 2011 (Peso)

January 1, 2011 (Peso) BALANCE SHEET Cash Accounts Receivable Inventory Building & Equipment Accumulated Depreciation Total Assets 1,400,000 400,000 1,200,000 1,000,000 (200,000) 3,800,000

1,100,000 1,400,000 1,200,000 1,000,000 (300,000) 4,400,000

Accounts Payable

300,000

360,000

Debt Payable Common Stock Retained Earnings Total Liab. & Equity

1,000,000 2,000,000 500,000 3,800,000

1,000,000 2,000,000 1,040,000 4,400,000

Required: If Leather's functional currency and reporting currency are the Argentine peso, compute the change to other comprehensive income that would result from the translation of these financial statements at December 31, 2011. Answer: Book value of beginning net assets = 2,500,000 pesos change in exchange rates ($.25 to $.20) = (0.05) $(125,000) Net income (change in R/E + dividends paid) = 840,000 change in exchange rates ($.23 to $.20) = (0.03) ( 25,200) Less Dividends = (300,000) change in exchange rates ($.21 to $.20) = (0.01) 3,000 Other comprehensive incomeTranslation loss $(147,200) Objective: LO6 Difficulty: Difficult