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Kiwi Painting Company engages in a number of foreign currency transactions in eu

ID: 2396096 • Letter: K

Question

Kiwi Painting Company engages in a number of foreign currency transactions in euros (). For each of the following independent transactions, determine the dollar amount to be reported in the December 31. 2004, financial statements for the items presented in the following requirements. The relevant direct exchange rates for the euro follow September 1 November 30, December 31, 2004 $1.05 1.02 2004 $0.90 0.96 2004 $0.98 1.01 Spot rate Forward rate for exchange on February 1, 2005 These are the independent transactions 1. Kiwi entered into a forward exchange contract on September 1, 2004, to be settled on February 1, 2005, to hedge a firm foreign currency commitment to purchase inventory on November 30, 2004, with payment due onFebruary 1, 2005. The forward contract was for 14,000, the agreed-upon cost of the inventory. The derivative is designated as a fair value hedge of the firm commitment 2. Kiwi entered into a forward exchange contract on September 1, 2004, to be settled on February 1, 2005, to hedge a forecasted purchase of inventory on November 30, 2004. The inventory was purchased on November 30 with payment due on February 1, 2005. The forward contract was for 14,000, the expected cost of the inventory. The derivative is designated as a cash flow hedge to be continued through to payment of the euro-denominated account payable. 3. Kiwi entered into a forward contract on November 30, 2004, to be settled on February 1, 2005, to manage the financial currency exposure of a euro-denominated accounts payable in the amount of 14,000 from the purchase of inventory on that date. The payable is due on February 1, 2005. The forward contract is not designated as a hedge. 4. Kiwi entered into a forward contract on September 1, 2004, to speculate on the possible changes in exchange rates between the euro and the U.S. dollar between September 1, 2004, and February 1, 2005. The forward contract is 14,000 for speculation purposes and is not a hedge Required Enter the dollar amount that would be shown for each of the following items as of December 31, 2004. Compute the statement amounts net. For example, if the transaction generated both a foreign currency exchange gain and a loss, specify just the net amount that would be reported in the financial statements

Explanation / Answer

ANSWER TO THIS QUESTION

Transaction 1

September 1:

Foreign Currency Receivable from Exchange Broker           13,440

Dollars Payable to Exchange Broker                                                13,440

(€14,000 x $0.96)

November 30:

Foreign Currency Receivable from Exchange Broker             840

Foreign Currency Transaction Gain                                                    840

[€14,000 x ($1.02 - $0.96)]

Foreign Currency Transaction Loss                                        840

Firm Commitment                                                                                840

Inventory (plug)                                                                     13,860

Firm Commitment (from above)                                              840

Accounts Payable (€14,000 x $1.05)                                                14,700

December 31:

Foreign Currency Transaction Loss                                           140

Foreign Currency Receivable from Exchange

Broker                                                                                                   140

[€14,000 x ($1.01 - $1.02)]

Accounts Payable                                                                     980

Foreign Currency Gain                                                                         980

[€14,000 x ($0.98 - $1.05)]

Foreign Currency Receivable from Exchange Broker (Forward Contract Receivable) =

$13,440 + $840- $140 = $14,140

Inventory = $13,860

Accounts Payable = $14,700 - $980 = $13,720

Foreign Currency Transaction Gain/Loss (Foreign Currency Exchange Gain/Loss) =

$840 gain - $840 loss - $140 loss + $980 gain = $840 gain

Other Comprehensive Income Gain/Loss Net = N/A

Transaction 2

September 1:

Foreign Currency Receivable from Exchange Broker           13,440

Dollars Payable to Exchange Broker                                                13,440

(€14,000 x $0.96)

November 30:

Foreign Currency Receivable from Exchange Broker             840

Other Comprehensive Income                                                            840

[€14,000 x ($1.02 - $0.96)]

Inventory                                                                                14,700

Accounts Payable                                                                             14,700

(€14,000 x $1.05)

December 31:

Other Comprehensive Income                                                   140

Foreign Currency Receivable from Exchange

Broker                                                                                                   140

[€14,000 x ($1.01 - $1.02)]

Accounts Payable                                                                     980

Foreign Currency Transaction Gain                                                     980

[€14,000 x ($0.98 - $1.05)]

Foreign Currency Transaction Loss                                         980

Other Comprehensive Income                                                             980

Note: Need to reclassify amount from OCI sufficient to completely offset the foreign currency transaction gain on the foreign currency accounts payable

Foreign Currency Receivable from Exchange Broker (Forward Contract Receivable) =

$13,440 + $840 - $140 = $14,140

Inventory = $14,700

Accounts Payable = $14,700 - $980 = $13,720

Foreign Currency Transaction Gain/Loss (Foreign Currency Exchange Gain/Loss) = N/A Other Comprehensive Income Gain/Loss Net = $840 gain - $140 loss + $980 gain =

$1,680 net gain

Transaction 3

November 30:

Foreign Currency Receivable from Exchange Broker           14,280

Dollars Payable to Exchange Broker                                                14,280

(€14,000 x $1.02)

Inventory                                                                                14,700

Accounts Payable                                                                             14,700

(€14,000 x $1.05)

December 31:

Foreign Currency Transaction Loss                                           140

Foreign Currency Receivable from Exchange

Broker                                                                                                   140

[€14,000 x ($1.01 - $1.02)]

Accounts Payable                                                                     980

Foreign Currency Gain                                                                         980

[€14,000 x ($0.98 - $1.05)]

Foreign Currency Receivable from Exchange Broker (Forward Contract Receivable) =

$14,280 - $140 = $14,140

Inventory = $14,700

Accounts Payable = $14,700 - $980 = $13,720

Foreign Currency Transaction Gain/Loss (Foreign Currency Exchange Gain/Loss) =

- $140 loss + $980 gain = $840 gain

Other Comprehensive Income Gain/Loss Net = N/A

Transaction 4

September 1:

Foreign Currency Receivable from Exchange Broker           13,440

Dollars Payable to Exchange Broker                                                13,440

(€14,000 x $0.96)

December 31:

Foreign Currency Receivable from Exchange Broker               700

Foreign Currency Transaction Gain                                                      700

[€14,000 x ($1.01 - $0.96)]

Foreign Currency Receivable from Exchange Broker (Forward Contract Receivable) =

$13,440 + $700 = $14,140

Inventory = N/A Accounts Payable = N/A

Foreign Currency Transaction Gain/Loss (Foreign Currency Exchange Gain/Loss) =

$700 gain

Other Comprehensive Income Gain/Loss Net = N/A

            Transaction                                     

1                     2                     3                     4

Forward Contract Receivable         $14,140        $14,140             $14,140          $14,140

Inventory                                           13,860          14,700               14,700                 NA Accounts Payable                             13,720          13,720               13,720                 NA Foreign Currency Exchange              840    G           NA               840    G          700   G

Gain (Loss), net

Other Comprehensive

Income

Gain (Loss), net

NA              1,680   G             NA                   NA

Computational support:

Forward Contract Receivable: $14,140 = €14,000 x $1.01 12/31 forward rate

Inventory: $13,860 =   $14,700 accounts payable less $840 firm commitment

$14,700 =    €14,000 x $1.05 11/30 spot rate

Accounts Payable: $13,720 = €14,000 x $0.98 12/31 spot rate

Foreign Currency Exchange Gain or (Loss), net:

Transaction 1: $840 =    $ 840 exchange gain on forward contract from change in forward rate from 9/1 to

11/30: (€14,000 x ($1.02 -$0.96))

- $840 exchange loss on firm commitment for change in forward rate from 9/1 to

11/30: (€14,000 x ($1.02 -$0.96))

-     140 exchange loss on forward contract from change in forward rate from 11/30 to

12/31: (€14,000 x ($1.01 -$1.02))

+ 980 exchange gain on account payable for change in spot rate from 11/30 to

12/31: (€14,000 x ($0.98 -$1.05))

Transaction 2:   No net foreign currency exchange gain because ASC 815 specifies an offset of the gain from the revaluation of the account payable by an equal amount from other comprehensive income.

Transaction 3: $840 =   $980 exchange gain on account payable from change in spot rate from 11/30 to 12/31: (€14,000 x ($0.98 -$1.05))

-    140 exchange loss on forward contract from change in forward rate from 9/1 to 12/31: (€14,000 x ($1.01 -$1.02))

Transaction 4: $700 =      $700     exchange gain on forward contract from change in forward rate from 9/1 to 12/31: (€14,000 x ($1.01 -$0.96))

Other Comprehensive Income Gain or (Loss), net:

Transaction 2: $1,680 =    $ 700 OCI gain on forward contract from change in forward rate from 9/1 to 12/31: (€14,000 x ($1.01 -$0.96))

+ 980 OCI gain on the reclassification from OCI to offset the exchange gain on the account payable from the change in the spot rate from 11/30 to 12/31, as required by ASC 815:

(€14,000 x ($0.98 -$1.05))