Question

Maple Company had the following export and import transactions during 20X5:

1. On March 1, Maple sold goods to a Canadian company for C$49,000, receivable on May 30. The spot rates for Canadian dollars were C$1 = $0.65 on March 1 and C$1 = $0.68 on May 30.
2. On July 1, Maple signed a contract to purchase equipment from a Japanese company for ¥440,000. The equipment was manufactured in Japan during August and was delivered to Maple on August 30 with payment due in 60 days on October 29. The spot rates for yen were ¥1 = $0.102 on July 1, ¥1 = $0.104 on August 30, and ¥1 = $0.106 on October 29. The 60-day forward exchange rate on August 30, 20X5, was ¥1 = $0.1055.
3. On November 16, Maple purchased inventory from a London company for £29,000, payable on January 15, 20X6. The spot rates for pounds were £1 = $1.65 on November 16, £1 = $1.63 on December 31, and £1 = $1.64 on January 15, 20X6. The forward rate on December 31, 20X5, for a January 15, 20X6, exchange was £1 = $1.645.

Required:
Prepare journal entries to record Maple’s import and export transactions during 20X5 and 20X6. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.)

a-1
1.Record the sale of goods.

2.Record the foreign currency transaction gain or loss.

3.Record the receipt of foreign currency receivables.

4. Record the receipt of foreign currency.

a-2
1. Record the commitment to purchase the equipment.

2.Record the purchase of the equipment.

3.Record the revaluation of the foreign currency.

4.Record the receipt of foreign currency.

5.Record the payment of accounts payable.

a-3

1. Record the purchase of inventory.

2.Record the revaluation of the foreign currency.

3.Record the revaluation of the foreign currency.

4.Record the receipt of the foreign currency.

5.Record the payment of accounts payable.

b. What amount of foreign currency transaction gain or loss would Maple report on its income statement for 20X5?
  
Part II
Assume that Maple used forward contracts to manage the foreign currency risks of all of its export and import transactions during 20X5.

1. On March 1, 20X5, Maple, anticipating a weaker Canadian dollar on the May 30, 20X5, settlement date, entered into a 90-day forward contract to sell C$49,000 at a forward exchange rate of C$1 = $0.64. The forward contract was not designated as a hedge.
2. On July 1, 20X5, Maple, anticipating a strengthening of the yen on the October 29, 20X5, settlement date, entered into a 120-day forward contract to purchase 440,000 at a forward exchange rate of ¥1 = $0.105. The forward contract was designated as a fair value hedge of a firm commitment.
3. On November 16, 20X5, Maple, anticipating a strengthening of the pound on the January 15, 20X6, settlement date, entered into a 60-day undesignated forward exchange contract to purchase £29,000 at a forward exchange rate of £1 = $1.67.

Required:
Prepare journal entries to record Maple’s foreign currency activities during 20X5 and 20X6. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.)

a-1
1. Record the entry for the 90-day forward contract signed for the forecasted foreign currency transaction.

2.Record the revaluation of the foreign currency.

3.Record the payment to the exchange broker in accordance with the forward contract.

4.Record the receipt of cash from the exchange broker.

a-2
1.Record the entry for the 120-day forward contract signed for the forecasted foreign currency transaction.

2.Record the revaluation of the foreign currency.

3.Record the gain or loss on the financial instrument aspect of the firm commitment.

4.Record the acquisition of the equipment.

5.Record the revaluation of the foreign currency.

6.Record the payment of cash to the exchange broker.

7.Record the receipt of foreign currency.

a-3
1.Record the entry for the signed 60-day undesignated forward contract.

2.Record the revaluation of the foreign currency.

3.Record the revaluation of the foreign currency.

4.Record the payment of cash to the exchange broker.

5.Record the receipt of foreign currency.

b. What amount of foreign currency transaction gain or loss would Maple report on its income statement for 20X5 if Parts I and II of this problem were combined?
  

c. What amount of foreign currency transaction gain or loss would Maple report on its income statement for 20X6 if Parts I and II of this problem were combined?
  

Answer 1

Dear Student,

As per the HOMEWORKLIB POLICY, only the first four questions should be answered. Kindly take note of it.

Part a-1

No.	date	General journal	debit	Credit
1	Mar. 1, 20X5	Accounts receivable (C$)	31850
		Sales (49000*0.65)		31850
		Record the sale of goods.
2	May 30, 20X5	Accounts receivable (C$) (49000*(0.68-0.65))	1470
		Foreign currency transaction gain		1470
		Record the foreign currency transaction gain or loss
3	May 30, 20X5	Foreign currency units (C$) (49000*0.68)	33320
		Accounts receivable (C$)		33320
		Record the receipt of foreign currency receivables
4	May 30, 20X5	Cash	33320
		Foreign currency units (C$)		33320
		Record the receipt of foreign currency

Part a-2

No.	date	General journal	debit	Credit
1	Jul. 1, 20X5	No journal entry required
		Record the commitment to purchase the equipment
2	Aug. 30, 20X5	Equipment (440000*0.104)	45760
		Accounts payable (¥)		45760
		Record the purchase of the equipment
3	Oct. 29, 20X5	Foreign currency transaction loss (440000*(0.102-0.104))	880
		Accounts payable (¥)		880
		Record the revaluation of the foreign currency
4	Oct. 29, 20X5	Foreign currency units (¥) (440000*0.106)	46640
		Cash		46640
		Record the receipt of foreign currency
5	Oct. 29, 20X5	Accounts payable (¥)	46640
		Foreign currency units (¥)		46640
		Record the payment of accounts payable

Part a-3

No.	date	General journal	debit	Credit
1	Nov. 16, 20X5	Inventory (29000*1.65)	47850
		Accounts payable (£)		47850
		Record the purchase of inventory
2	Dec. 31, 20X5	Accounts payable (£) (29000*(1.65-1.63)	580
		Foreign currency transaction gain		580
		Record the revaluation of the foreign currency
3	Jan. 15, 20X6	Foreign currency transaction loss (29000*(1.63-1.64))	290
		Accounts payable (£)		290
		Record the revaluation of the foreign currency
4	Jan. 15, 20X6	Foreign currency units (£) (29000*1.64)	47560
		Cash		47560
		Record the receipt of foreign currency
5	Jan. 15, 20X6	Accounts payable (£)	47560
		Foreign currency units (£)		47560
		Record the payment of accounts payable

Part B

Foreign currency transaction

Net gain

of

$1170

1470-880+580 = 1170