Download Advanced Accounting by Hoyle et al, 6th Edition

Slide
9-1
Chapter Nine
Foreign
Currency
Transactions
and Hedging
Foreign
Exchange Risk
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
9-2
Foreign Exchange Markets



McGraw-Hill/Irwin
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.
The cost of those
currencies is called the
exchange rate.
© The McGraw-Hill Companies, Inc., 2004
Slide
9-3
Exchange Rate Mechanisms



McGraw-Hill/Irwin
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.
© The McGraw-Hill Companies, Inc., 2004
Slide
9-4
Foreign Exchange Rates

Exchange rates are
published daily in the
Wall Street Journal.
 These are “end-of-
day” rates.
 As of 4:00pm Eastern
time

Remember – Rates
change constantly
during the day
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
9-5
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.
McGraw-Hill/Irwin
¥ = $?
© The McGraw-Hill Companies, Inc., 2004
Slide
9-6
Foreign Exchange Rates



McGraw-Hill/Irwin
Spot Rates
The exchange rate that is
available today.
Forward Rates
The exchange rate that
can be locked in today for
an expected future
exchange transaction.
The actual spot rate at the
future date may differ from
today’s forward rate.
© The McGraw-Hill Companies, Inc., 2004
Slide
9-7
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.
McGraw-Hill/Irwin
But if the spot rate is
$.0069 US in 30 days,
we still have to pay
$.0080 US and we
lose $1,100!
© The McGraw-Hill Companies, Inc., 2004
Slide
9-8
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 ¥.
McGraw-Hill/Irwin
That way, if the spot
rate is $.0069 in 30
days, we only lose
the $20 cost of the
option contract!
© The McGraw-Hill Companies, Inc., 2004
Slide
9-9
Foreign Currency Transactions

A U.S. company
buys or sells
goods or
services to a
party in another
country.
 The transaction
is often
denominated in
the currency of
the foreign party.
McGraw-Hill/Irwin
The major
accounting issue:
How do we account
for the changes in
the value of the
foreign currency?
© The McGraw-Hill Companies, Inc., 2004
Slide
9-10
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.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
9-11
Foreign Currency Transactions
When a transaction
occurs on one date
(for example a
credit sale) . . .
. . . but the cash flow
is at a later date . . .
12/10/05 1 £ = $1.5750 US
1/9/05 1 £ = $1.5800 US
?
. . . fluctuating
exchange rates can
result in exchange
rate gains or losses.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
9-12
Foreign Currency Transactions
When the rate is
expressed as the US $
equivalent of 1 unit of
foreign currency, the
rate is called a
“DIRECT QUOTE”
McGraw-Hill/Irwin
12/10/05 1 £ = $1.5750 US
1/9/05 1 £ = $1.5800 US
?
© The McGraw-Hill Companies, Inc., 2004
Slide
9-13
Foreign Currency Transactions
When the rate is
expressed as the US $
equivalent of 1 unit of
foreign currency, the
rate is called a
“DIRECT QUOTE”
When the rate is
expressed as the
number of foreign
currency units that $1
will buy, the rate is
called an
“INDIRECT QUOTE”
McGraw-Hill/Irwin
12/10/05 1 £ = $1.5750 US
1/9/05 1 £ = $1.5800 US
12/10/05 .6349 £ = $1 US
1/9/05 .6329 £ = $1 US
© The McGraw-Hill Companies, Inc., 2004
Slide
9-14
Foreign Exchange Transaction
Example
On 12/1/04, BobCo sells inventory to Coventry
Corp. on credit. Coventry will pay BobCo
10,000 British pounds in 90 days.
The current exchange rate is $1 = .6425 £.
Prepare BobCo’s journal entry.
BOBCO's GENERAL JOURNAL
Date
Dec
Description
1 A/R (to be collected in £)
Sales
10,000£ ÷ .6425 = 15,564
amounts rounded
McGraw-Hill/Irwin
Page
Debit
34
Credit
15,564
15,564
© The McGraw-Hill Companies, Inc., 2004
Slide
9-15
Foreign Exchange Transaction
Example
On 12/31/04, the exchange rate is $1 = .6400 £.
At the balance sheet date we have to
“remeasure”, or adjust, the original A/R to
the current exchange rate.
BOBCO's GENERAL JOURNAL
Date
Description
Dec 31 A/R
Foreign Exchange Gain
15,564 - (10,000£ ÷ .6400)
amounts rounded
McGraw-Hill/Irwin
Page
Debit
34
Credit
61
61
© The McGraw-Hill Companies, Inc., 2004
Slide
9-16
Foreign Exchange Transaction
Example
On 3/1/05, Coventry Corp. pays BobCo the
10,000 £ for the 12/1/04 sale.
The exchange rate on 3/1/05, was $1 = .6500 £.
On 3/1/05, we have to do TWO things.
First, we have to “remeasure” the A/R.
BOBCO's GENERAL JOURNAL
Date
Mar
Description
1 Foreign Exchange Loss
A/R
15,625 - (10,000£ ÷ .6500)
amounts rounded
McGraw-Hill/Irwin
Page
Debit
34
Credit
240
240
© The McGraw-Hill Companies, Inc., 2004
Slide
9-17
Foreign Exchange Transaction
Example
On 3/1/05, Coventry Corp. pays BobCo the
10,000 £ for the 12/1/04 sale.
The exchange rate on 3/1/05, was $1 = .6500 £.
On 3/1/05, we have to do TWO things.
Second, we have record the receipt of the £.
BOBCO's GENERAL JOURNAL
Date
Mar
1 Cash
A/R
McGraw-Hill/Irwin
Description
Page
Debit
34
Credit
15,385
15,385
© The McGraw-Hill Companies, Inc., 2004
Slide
9-18
Hedging Foreign Exchange Risk
To control for the risk of
exchange rate fluctuation,
a forward contract for
currency can be
purchased.
McGraw-Hill/Irwin
Hedging effectively
reduces the
uncertainty associated
with fluctuating
exchange rates.
© The McGraw-Hill Companies, Inc., 2004
Slide
9-19
Hedging Foreign Exchange Risk

To hedge a foreign
currency
transaction,
companies use
foreign currency
derivatives
 Two most common
tools:
 Foreign currency
forward contracts
 Foreign currency
options
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
9-20
Accounting for Derivatives
SFAS 133 provides guidance for hedges of
four types of foreign exchange risk.
Recognized
foreign currency
denominated
assets &
liabilities.
Unrecognized
foreign currency
firm
commitments.
McGraw-Hill/Irwin
Forecasted
foreign currency
denominated
transactions.
Net investments
in foreign
operations
(Chapter 10).
© The McGraw-Hill Companies, Inc., 2004
Slide
9-21
Accounting for Derivatives



McGraw-Hill/Irwin
Often a transaction involving a
credit sale/purchase is
denominated in a foreign
currency.
On the transaction date, the
foreign currency
receivable/payable is recorded.
If a forward contract is entered
into to hedge the transaction,
SFAS No. 133 requires the
forward contract be carried at
FAIR VALUE.
?
© The McGraw-Hill Companies, Inc., 2004
Slide
9-22
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.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
9-23
Accounting for Hedges
As the Fair Value of a forward contract
changes, gains or losses are recorded.
On 12/31/03, Bob has a forward
contract to deliver 500,000¥ to
Inuwashi Company on 1/31/04
at 120¥ = $1. The available 31day forward rate on 12/31/03 is
122.50¥ = $1.
Bob uses a discount rate of 6%.
What is the value of the
forward contract on 12/31/03
McGraw-Hill/Irwin
$-value of the
500,000¥ at the
currently available
forward rate
$-value of the
500,000¥ at the
contracted rate
Loss on Forward
Contract
?
The present value
at 12/31/03
$
4,082
4,167
$
85
$ 84.6110
© The McGraw-Hill Companies, Inc., 2004
Slide
9-24
Accounting for Hedges
There are two ways that a foreign currency
hedge can be accounted for.
Cash
Flow
Hedge
Fair
Value
Hedge
Gains/losses are
recorded to
Comprehensive Income
Gains/losses are
recorded to the Income
Statement
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
9-25
Let’s try a Cash Flow Hedge
Example
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
9-26
Cash Flow Hedge - Date of
Transaction Example
On 4/1/04, 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, 2004).
The current exchange rate is $1 = 9.5000 pesos.
Prepare MPG’s journal entry on 4/1/04.
MPG, Inc. General Journal
Date
Apr
1
McGraw-Hill/Irwin
Description
Purchases
A/P
Amounts rounded
Page
Debit
18
Credit
10,526
10,526
© The McGraw-Hill Companies, Inc., 2004
Slide
9-27
Cash Flow Hedge - Date of
Transaction Example
Assume that MPG takes a 180-day
forward contract to buy 100,000
pesos. The forward contract rate is
9.7400 pesos = $1.
MPG, Inc. General Journal
Date
Description
Page
Debit
18
Credit
This is an executory contract, so
no entry is made on the contract
date.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
9-28
Cash Flow Hedge - Interim
Reporting Date Example
At MPG’s year-end, 6/30/04, the value of the
foreign currency payable must be remeasured, or adjusted, based on the 6/30/04
spot rate of $1 = 9.5250 pesos.
1. Remeasure the original payable:
MPG, Inc. General Journal
Date
Description
Jun 30 A/P (pesos)
Foreign Exchange Gain
100,000 ÷ 9.525 = $10,499
$10,526 - $10,499 = 27
Amounts rounded
McGraw-Hill/Irwin
Page
Debit
25
Credit
27.00
27.00
© The McGraw-Hill Companies, Inc., 2004
Slide
9-29
Cash Flow Hedge - Interim
Reporting Date Example
2. In addition, we record an entry to
Accumulated Other Comprehensive
Income (AOCI) to offset the exchange
gain/loss associated with the original
transaction.
MPG, Inc. General Journal
Date
Description
Jun 30 Foreign Exchange Loss
AOCI
McGraw-Hill/Irwin
Page
Debit
25
Credit
27.00
27.00
© The McGraw-Hill Companies, Inc., 2004
Slide
9-30
Cash Flow Hedge - Interim
Reporting Date Example
Also, on 6/30/04, the forward contract must
be recorded. The available forward rate to
October 8, 2004 is $1 = 9.6200 pesos.
MPG uses a 6% discount rate.
3. Record the forward contract:
MPG, Inc. General Journal
Date
Description
Jun 30 Forward Contract
AOCI
at the 90-Day Rate = $10,395
at the Contract Rate = $10,267
PV factor = .9851
McGraw-Hill/Irwin
Page
Debit
25
Credit
126.09
126.09
© The McGraw-Hill Companies, Inc., 2004
Slide
9-31
Cash Flow Hedge - Interim
Reporting Date Example
4. Finally, we have to amortize the discount
from the original transaction date.
In the original transaction, we had a discount
of $11 ($10,267 - $10,256). Amortize the
discount using the straight-line method.
MPG, Inc. General Journal
Date
Description
Jun 30 Discount Expense
AOCI
McGraw-Hill/Irwin
Page
Debit
25
Credit
5.50
5.50
© The McGraw-Hill Companies, Inc., 2004
Slide
9-32
Cash Flow Hedge - Date of
Collection Example
On 10/8/04, both the original receivable and the
exchange contract come due. The 10/8/04
exchange rate is $1 = 9.4000 pesos.
1. 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
McGraw-Hill/Irwin
Page
Debit
40
Credit
139
139
© The McGraw-Hill Companies, Inc., 2004
Slide
9-33
Cash Flow Hedge - Date of
Collection Example
2. As at year-end, MPG must
record an entry to offset the
foreign exchange loss of $139.
MPG, Inc. General Journal
Date
Oct
Description
8 AOCI
Foreign Exchange Gain
McGraw-Hill/Irwin
Page
Debit
25
Credit
139
139
© The McGraw-Hill Companies, Inc., 2004
Slide
9-34
Cash Flow Hedge - Date of
Collection Example
On 10/8/04, both the original payable and the
exchange contract come due. The 10/8/04
exchange rate is $1 = 9.4000 pesos. .
3. Adjust the Forward Contract:
MPG, Inc. General Journal
Date
Oct
Description
Page
Debit
8 Forward Contract
244.91
AOCI
at the Current Rate = $10,638
at the Contract Rate = $10,267
Current Forward Contract = $126.09
McGraw-Hill/Irwin
25
Credit
244.91
© The McGraw-Hill Companies, Inc., 2004
Slide
9-35
Cash Flow Hedge - Date of
Collection Example
4. Finally, we have to amortize the rest of the
discount from the original transaction date.
In the original transaction, we had a discount
of $11 ($10,267 - $10,256). Amortize the
discount using the straight-line method.
MPG, Inc. General Journal
Date
Oct
Description
8 Discount Expense
AOCI
McGraw-Hill/Irwin
Page
Debit
25
Credit
5.50
5.50
© The McGraw-Hill Companies, Inc., 2004
Slide
9-36
Cash Flow Hedge - Date of
Collection Example
On 10/8/04, both the original payable and the
exchange contract come due. The 10/8/04
exchange rate is $1 = 9.4000 pesos.
5. Purchase the 100,000 pesos:
MPG, Inc. General Journal
Date
Oct
Description
8 Foreign Currency (pesos)
Cash
McGraw-Hill/Irwin
Page
Debit
40
Credit
10,267
10,267
© The McGraw-Hill Companies, Inc., 2004
Slide
9-37
Cash Flow Hedge - Date of
Collection Example
On 10/8/04, both the original payable and the
exchange contract come due. The 10/8/04
exchange rate is $1 = 9.4000 pesos.
6. Complete the Forward Contract Payable:
MPG, Inc. General Journal
Date
Oct
Description
8 A/P (pesos)
Forward Contract
Foreign Currency (€)
McGraw-Hill/Irwin
Page
Debit
40
Credit
10,638
371
10,267
© The McGraw-Hill Companies, Inc., 2004
Slide
9-38
Now, let’s try a Fair Value
Hedge.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
9-39
Fair Value Hedge - Date of
Transaction Example
On 12/1/04, 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,
2005).
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
McGraw-Hill/Irwin
Page
Debit
18
Credit
19,400
19,400
© The McGraw-Hill Companies, Inc., 2004
Slide
9-40
Fair Value Hedge - Date of
Transaction Example
Balloon Co buys a 90-day forward
contract to pay 20,000 €. Balloon
contracts for the 90-day forward rate
on 12/1/04 of $.9500 = 1 €.
BALLOON CO. GEN'L JOURNAL
Date
Description
Page
Debit
18
Credit
This is an executory contract, so
no entry is made on the contract
date.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
9-41
Fair Value Hedge - Interim
Reporting Date Example
On 12/31/04, the value of the foreign currency
receivable must be adjusted based on the
12/31/04 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
McGraw-Hill/Irwin
Page
Debit
25
Credit
100.00
100.00
© The McGraw-Hill Companies, Inc., 2004
Slide
9-42
Fair Value Hedge - Interim
Reporting Date Example
Also, on 12/31/04, the forward contract must be
recorded. The available forward rate to
March 1, 2005 is $.9520 = 1 €. Balloon uses a
6% discount rate.
 Record the forward contract:
BALLOON CO. GEN'L JOURNAL
Date
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
McGraw-Hill/Irwin
Page
Debit
25
Credit
39.60
39.60
© The McGraw-Hill Companies, Inc., 2004
Slide
9-43
Fair Value Hedge - Date of
Collection Example
On 3/1/05, both the original receivable and the
forward contract come due. The 3/1/05
exchange rate is $.9540 = 1 €.
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
McGraw-Hill/Irwin
Page
Debit
40
Credit
220
220
© The McGraw-Hill Companies, Inc., 2004
Slide
9-44
Fair Value Hedge - Date of
Collection Example
On 3/1/05, both the original receivable and the
forward contract come due. The 3/1/05
exchange rate is $.9540 = 1 €.
 Adjust the Forward Contract Payable:
BALLOON CO. GEN'L JOURNAL
Date
Mar
Description
1 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
McGraw-Hill/Irwin
Page
Debit
40
Credit
40.40
40.40
© The McGraw-Hill Companies, Inc., 2004
Slide
9-45
Fair Value Hedge - Date of
Collection Example
On 3/1/05, both the original receivable and the
forward contract come due. The 3/1/05
exchange rate is $.9540 = 1 €.
3. Collect the 20,000 € in settlement of the
Account Receivable:
BALLOON CO. GEN'L JOURNAL
Date
Mar
Description
1 Foreign Currency (€)
Accounts Receivable (€)
McGraw-Hill/Irwin
Page
Debit
40
Credit
19,080
19,080
© The McGraw-Hill Companies, Inc., 2004
Slide
9-46
Fair Value Hedge - Date of
Collection Example
On 3/1/05, both the original receivable and the
forward contract come due. The 3/1/05
exchange rate is $.9540 = 1 €.
4. Complete the Forward Contract:
BALLOON CO. GEN'L JOURNAL
Date
Mar
Description
1 Cash ($)
Forward Contract
Foreign Currency (€)
McGraw-Hill/Irwin
Page
Debit
40
Credit
19,000
80
19,080
© The McGraw-Hill Companies, Inc., 2004
Slide
9-47
Using a Foreign Currency Option
as a Hedge

An option is a
contract that
allows you to
exercise a
predetermined
exchange rate if
it is to your
advantage.
 Options carry a
cost.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
9-48
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 covered
in most finance texts.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
9-49
Using a Foreign Currency Option
as a Hedge
SFAS 133 requires that the
option 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
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
9-50
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.
McGraw-Hill/Irwin
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.
© The McGraw-Hill Companies, Inc., 2004
Slide
9-51
Foreign Currency Firm
Commitment - Example
On December 1, 2004, Amerco receives an
order from a German customer. The
delivery date is March 1, 2005, 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
18
Credit
These are executory contracts, so
no entries are made on this date.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004
Slide
9-52
Foreign Currency Firm
Commitment - Example
Amerco will receive 1,000,000 € on March 1,
2005. A forward contract was entered
into to sell the euros at a price of $.905 =
1 €. Amerco’s discount rate is 12%.
On 12/31/04, the currently available forward
rate is $.916 = 1 €.
1. Record the forward contract.
Amerco General Journal
Date
McGraw-Hill/Irwin
Description
Page
Debit
18
Credit
© The McGraw-Hill Companies, Inc., 2004
Slide
9-53
Foreign Currency Firm
Commitment - Example
1,000,000 € @ the contract rate of $.905
$
905,000
1,000,000 € @ 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%
12/31/04 fair value of the forward contract.
Amerco General Journal
Date
Description
Dec 31 Loss on Forward Contract
Forward Contract
McGraw-Hill/Irwin
0.9803
$
(10,783)
Page
18
Debit
Credit
10,783
10,783
© The McGraw-Hill Companies, Inc., 2004
Slide
9-54
Foreign Currency Firm
Commitment - Example
Amerco will receive 1,000,000 € on March 1,
2005. A forward contract was entered
into to sell the euros at a price of $.905 =
1 €. Amerco’s discount rate is 12%.
On 12/31/04, 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.
McGraw-Hill/Irwin
Page
Debit
18
Credit
10,783
10,783
© The McGraw-Hill Companies, Inc., 2004
Slide
9-55
Foreign Currency Firm
Commitment - Example
On March 1, 2005, Amerco receives
1,000,000 € from the German customer
upon deliver of the order. On 3/1/05, 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
McGraw-Hill/Irwin
Page
Debit
18
Credit
15,783
15,783
© The McGraw-Hill Companies, Inc., 2004
Slide
9-56
Foreign Currency Firm
Commitment - Example
On March 1, 2005, Amerco receives
1,000,000 € from the German customer
upon deliver of the order. On 3/1/05, the
spot rate is $.900 = 1 €.
2. Record an offsetting loss associated
with the Firm Commitment.
Amerco General Journal
Date
Mar
Description
1 Loss on Firm Commitment
Firm
Commitment
Note
that
the balance in the
Firm Commitment is now
$5,000 CR.
McGraw-Hill/Irwin
Page
Debit
18
Credit
15,783
15,783
© The McGraw-Hill Companies, Inc., 2004
Slide
9-57
Foreign Currency Firm
Commitment - Example
On March 1, 2005, Amerco receives
1,000,000 € from the German customer
upon deliver of the order. On 3/1/05, the
spot rate is $.900 = 1 €.
3. Record the receipt of the foreign
currency.
Amerco General Journal
Date
Mar
Description
1 Foreign Currency (€)
Sales
McGraw-Hill/Irwin
Page
Debit
18
Credit
900,000
900,000
© The McGraw-Hill Companies, Inc., 2004
Slide
9-58
Foreign Currency Firm
Commitment - Example
On March 1, 2005, Amerco receives
1,000,000 € from the German customer
upon deliver of the order. On 3/1/05, the
spot rate is $.900 = 1 €.
4. Record the fulfilling of the forward
contract.
Amerco General Journal
Date
Mar
Description
1 Cash
Forward Contract
Foreign Currency
McGraw-Hill/Irwin
Page
Debit
18
Credit
905,000
5,000
900,000
© The McGraw-Hill Companies, Inc., 2004
Slide
9-59
Foreign Currency Firm
Commitment - Example
On March 1, 2005, Amerco receives
1,000,000 € from the German customer
upon deliver of the order. On 3/1/05, the
spot rate is $.900 = 1 €.
5. Close the Firm Commitment to Net
Income.
Amerco General Journal
Date
Mar
Description
1 Firm Commitment
Adjustment to Net Income
McGraw-Hill/Irwin
Page
Debit
18
Credit
5,000
5,000
© The McGraw-Hill Companies, Inc., 2004
Slide
9-60
The End . . .
. . . sort of
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2004