Question

P13-11 Importing and Exporting Transactions; Hedges of Exposed Foreign Currency Asset and Lia- bility Positions; Identifiable Foreign Currency Commitment; Speculative Forward Exchange Contract; Intervening Balance Sheet Date Reynolds Corporation has extensive dealings with foreign suppliers and buyers. During the first six months of the fiscal year 19X5, Reynolds reported the following foreign transactions, all of which are denominated in the local currency of the respec- tive foreign firm. Reynolds prepares financial statements on June 30 and December 31 of each year January Sold merchandise to Company T of Denmark for 200,000 kroner; payment is due in 60 days. The exchange rate at the time was S.15 per krone. On this date, Reynolds entered into a forward exchange contract with a local bank to sell 200,000 kroner to be delivered on March 1. The exchange rate for future delivery was $.14 15 Signed an agreement with Company U of India to purchase merchandise for 500,000 rupees; merchandise is to be delivered on August 1. The spot rate for the rupee was S.18. To avoid the risk of fluctuation in foreign exchange rates, Reynolds entered into a forward exchange contract to re ceive 500,000 rupees on August 1 at a current forward exchange rate of S.19. The forward exchange contract qualifies as a hedge of an identifiable foreign currency commitment. Any premium or discount on the forward exchange contract is deferred 25 Purchased equipment from Company V of Canada for 50,000 Canadian dollars when the exchange rate was $.98 for the Canadian dollar. The in- voice price is to be paid on March 25. March Received payment from Company T of Denmark. Delivered 200,000 kro- ner to the bank in accordance with terms of the forward exchange contract (January 1 transaction). The spot rate for the krone on March 1 was S.16. 25 Paid in full Company V of Canada. The exchange rate for the Canadian dollar was $1.02 on this date. May Entered into a forward exchange contract to speculate in British pounds. Terms of the forward exchange contract call for Reynolds to purchase 30,000 British pounds for delivery in three months. The current spot rate for the British pound was $1.75, and the three-month future rate was $1.72. 20 Sold merchandise to Company W of France for 200,000 French francs: FOREIGN CURRENCY TRANSACTIONS 681 payment is due in one month. The current exchange rate for the frane was $.20 Purchased merchandise from Company X of Mexico for 1,000,000 pesos. The exchange rate for the peso was S.06. The invoice price is to be paid on August I June 20 Received full settlement from Company W of France. On this date, the exchange rate for the franc was $.19. REQUIRED a) Prepare entries on the books of Reynolds Corporation to record the preceding transactions b) Prepare entries on the books of Reynoids Corporation to value properly the accounts receivable and payable for midyear financial statements of June 30, 19X5, assuming the current exchange rates were as foilows: Rupce Peso One-month forward rate for British pound $ .20 .05 1.70

Answer 1

A) Journal entries of Renolds Corporation for the period ended June 30 and December 31

Date	Particular	Debit ( in $)	Credit (in $)
January 1
At the time of sale
	Accounts receivable A/C	30000
	To Sale		30000
	(Being sale of merchandise recorded at spot rate of 1 Kerone=$0.15
At the time of settlement (March 1)	Cash	28000
	Foreign exchange	2000
	To Accounts receivable		30000
January 15
At the time of Purchase	Purchases a/c	90000
	To Accounts Payable		90000
	(Being accounting for purchases at the time of purchase)
January 15	Deferred Premium a/c	5000
	To Amount payable to bank		5000
	(Being deferrement of premium on payable)
June 30
At the time of balance sheet	Premium a/c	4375
	To Deferred premium		4375
	(Being amortisation of premium payable proportionately to balance sheet date)
At the time of balance sheet date	Foreign exchange loss a/c	10000
	TO Accounts payable		10000
August 1
At the time of settlement	Premium A/C	625
	To Deferred premium		625
	(Being amortisation of premium remaining)
At the time of making payment	Accounts payable a/c	100000
	TO Cash		95000
	To Foreign exchange gain		5000
	(Being settlement of amount payable)
January 25	Plant and equipment	49000
	TO Accounts payable		49000
	(Being purchase of plant and equipment payable on march 25)
March 1	Cash a/c	2000
	TO Foregin exchange gain		2000
	(Being delivery of foreign exchange contract)
March 25	Accounts payable	49000
	Foreign exchange loss a/c	2000
	To Cash		50000
	(Being payment on supply of equipment at the exsiting forex rate)
May 1	Speculation a/c	52500
	TO Payable a/c		52500
	(Being purchase of british pound for delivery in three months)
May 1	Speculation loss a/c	900
	To cash		900
	(Being loss on speculation accounted)
May 20	Accounts receivable a/c	40000
	To Sales		40000
	(Being accounting of sales at spot exchange rate)
June 1	Purchases a/c	6000
	To Accounts payable		6000
	(Being purchase of merchandise at spot exchange rate)
June 20	Cash a/c	38000
	Foreign exchange loss a/c	2000
	To Accounts receivable		40000
	(Being accounting for settlement of receivables)
August 1	Accounts payable a/c	6000
	To Cash		6000
	(Being payment for purchase of merchandise accounted at spot rate)

B) Journal entries for receivables and payables at the balance sheet date:

Date	Journal entry	Debit ( in $)	Credit (in $)
June 30	Foreign exchange loss a/c	10000
	TO Accounts payable		10000
	(Being accounting of foreign exchange loss at the balance sheet date for indian purchases)
Accounting of premium on forward contract	Premium a/c	4375
	To Deferred premium		4375
	(Being amortisation of premium payable proportionately to balance sheet date)