Question

Wolfe Computer is a US company that manufactures portable personal compu components for the computer are purchased abroad, and the finished products purchased abroad, and the finished product is sold in foreign countries as well as in the United States. Among the recent transactions ctions of Wolfe are the following: res portable personal computers. Many of the Oct. 28 Purchased from Mitsutonka, a Japanese company 20.000 disk drives. The purchase price was 180.000.000, payable in 30 days Current exchange rate, $0.0105 per yen. (Wolfe uses the perpetual inventory.methoda dehit the inventory of Raw Material account.) Nov. 9 Sold 700 personal computers to the Bank of England for £604,500 due in 30 days. The cost of the computers, to be debited to the cost of Goods Sold account, was $518,000. Current exchange rate, $1.65 per British pound. (Use one compound journal entry to record the sale and the cost of goods sold. In recording the cost of goods sold. credit Inventory of Finished Goods.) Nov. 27 Issued a check to Inland Bank for $1.836.000 in full payment of account payable to Mitsutonka Dec. 2 Purchased 10.000 gray-scale monitors from German Optical for €1,200,000, payable in 60 days. Current exchange rate, $0.7030 per euro. (Debit Inventory of Raw Materials.) Dec. 9 Collected dollar-equivalent of £604,500 from the Bank of England. Current exchange rate, $1.63 per British pound. Dec. 11 Sold 10.000 personal computers to Computique, a Swiss retail chain, for SFr23.750.000, due in 30 days. Current exchange rate, 50.6000 per Swiss franc. The cost of the computers, to be debited to Cost of Goods Sold and credited to Inventory of Finished Goods, is $7.400,000 Instructions a. Prepare in general journal form the entries necessary to record the preceding transactions. b. Prepare the adjusting entries needed at December 31 for the €1,200,000 account payable to German Optical and the SF-23,750,000 account receivable from Computique. Year-end exchange rates. $0.7000 per euro and 50.5980 per Swiss franc. (Use a separate joumal entry to adjust each account balance.) c. Compute to the nearest dollar) the unit sales price of computers in U.S. dollars in either the November 9 or December 11 sales transaction. The sales price is the same in each transaction.) d. Compute the exchange rate for the yen, stated in U.S. dollars, on November 27. e. Explain how Wolfe Computer could have hedged its position to reduce the risk of loss from exchange rate fluctuations on (1) its foreign payables and (2) its foreign receivables.

Answer 1

JE
Date		Basis of Calculation	Debit($)	Credit($)
Oct-28	Inventory		18,90,000
	Accounts Payable			18,90,000
	( Purchase 20000 disk ,The purchase
	price Yan 180,000,000
	Current exchange rate $0.0105 per yen	180000000*0.0105
Nov-09	Account Receivable - Debtors	604500*1.65	9,97,425
	Cost of goods sold( as per Question)		5,18,000
	Inventory			5,18,000
	Revenue			9,97,425
	Account receivable workings
	Sale of 700 computers
	Price- GBP 604500
	Current exchange rate $1.65 per gbp
;Nov 27	Accounts Payable		18,90,000
	Cash			18,36,000
	Gain of foreign currrency exchange fluctuation			54,000
	( Liability was $ 1890000 against actualcash
	outflow $ 1836000
Dec2	Inventory of Raw Material	1200000*0.7030	843600
	Account Payable			8,43,600
	( purchase 10000 gray scale montior
	Euro 1,200,000
	Current exchange rate $0.7030 per Euro
Dec9	Cash	604500*1.63	9,85,335
	Loss on Exchange currency fluctuation		12,090
	Account Receivable - Debtors	604500*1.65		9,97,425
	( Exchange differene - $ 1.65 vd $ 1.63)
Dec11	Account Receivable - Debtors	23750000*0.6	1,42,50,000
	Cost of goods sold( as per Question)		74,00,000
	Inventory			74,00,000
	Revenue			1,42,50,000
	Account receivable workings
	Sale of 10000 computers
	Price- Swiss Franc 23,750,000
	Current exchange rate $0.6 per Swiss Franc

		Basis of Calculation	Debit($)	Credit($)
Dec31	Adjusted JE
	Account Payable	1200000*(0.7030-0.7)	3600
	Gain of foreign currency exchange fluctuation			3,600
	( Exchange rate on Dec 2 was $ 0.7030/ Euro
	Dec 31 , exchange rate improve $ 0.7000/ Euro
	Euro 1200.0000
	Loss of foreign currency exchange fluctuation	23750000*(0.6-0.598)	47500
	Account Receivable - Debtors			47,500
	( change in exchange rate
	Dec 11 - Receivable exchange rate
	was $ 0.6 / Swiss Franc
	Now rate $ 0.598 / Swiss Franc

Unit sale price per $(Qc)		Basis of Calculation
Assume Nov 9 Transaction			amount ( $)
	Sale of 700 computers	604500*1.65	997425
	Price- GBP 604500
	Current exchange rate $1.65 per gbp
	Number of units ( Computers)		700
	Sale price per unit		1,425

Question d

On the basis of Nov 27 transaction calculate Yen /dollar rate
	( Purchase 20000 disk ,The purchase
	price Yan 180,000,000	18,00,00,000
	Current exchange rate $0.0105 per yen
	Payment of $	18,36,000
	$/Yen	0.0102

Euro '1200000*0.7030== Accounts Payable EURO1200000 current exchange rate $0.7030/Euro - 60 days matured period
Regarding Hedge of Accounts payable , Wolfe needs to go for future contract with equivalent amount and same exchange rate
So While settlement , Wolfe can mature future contract and payoff accounts Payable . Any exchange gain or loss adjusted accordingly
To hedge above payable , Wolfe can opt for future short put and do hedging the same
23750000*0.6= Account Receivable Swiss Franc 23750000 current exchange rate $0.6/Swiss Franc - 30 day collection
To hedge above Receivable , Wolfe can opt for future short call   and do hedging the same
Wolfe has to entered into future transaction to payable same equivalent amount to hedge above receivable in 30 days
period