On July 1, 2015 the West Company purchased a 1,000,000 Pound Sterling CD from th
ID: 2479040 • Letter: O
Question
On July 1, 2015 the West Company purchased a 1,000,000 Pound Sterling CD from the Kardashian Bank of London. This 10% 3 year CD pays interest on June 30. Additional information is as follows: July 1, 2015 $1.85 = 1 pound sterling December 31, 2015 $1.99 = 1 pound sterling June 30, 2016 $1.88 = 1 pound sterling December 31, 2016 $2.02 = 1 pound sterling June 30, 2017 $2.05 = 1 pound sterling December 31, 2017 $2.07 = 1 pound sterling June 30, 2018 $2.00 = 1 pound sterling Required; a) prepare all necessary journal entries made by the West Company with respect to its investment in the Kardashian CD. Hint: don’t forget adjusting entries at the end of each year. b) How much income or loss does West show in 2015, 2016, 2017 and 2018 due to its investment in Kardashian? c) If West had purchased a forward contract on July 3rd 2015 to sell the 1 million pound sterling for $1.99 how would the income or loss of West have been different in 2015, 2016, 2017, 2018? You can ignore the pv calculations but I do want dollar answers.
Explanation / Answer
A)
Interest Payment Schedule-Annual Basis n=3, k =10%
Date
Amount
PV
Exchange Value(EV)
Gain (loss) =(EV-PV)
July 1,2015
10% * 1,000,000* 1.100
100,000* 1.85
=$185,000
10%*1000000 * 1.85
=$185,000
0
June 30 2016
10% * 1000000 * 1.10-1
90,909.09 * 1.88=$170,909.09
10% * 1000000 * 1.88
=$188,000
$17,090.91
June 30 2017
10% * 1000000 * 1.10-2
82,644.6 * 2.05
=$169,421.40
10%* 1000000 * 2.05
=$205,000
$35,578.60
June 30 2018
10%* 1000000 * 1.10-3
75,131.5 * 2.00
=$150,263
10% * 1000000 * 2.00
=$200,000
$49,737
Total Gain
$102,406.51
Journal Entry
B)
Date
Gain (loss) =(EV-PV)
July 1,2015
0
June 30, 2016
$17,090.91
June 30 ,2017
$35,578.60
June 30 ,2018
$49,737
Total Gain
$102,406.51
C)
Date
Amount
PV
Exchange Value(EV)
Gain (loss) =(EV-PV)
July 3,2015
10% * 1,000,000 * 1.100
100,000 * 1.85
=$185,000
10% * 1000000 * 1.99
=$199,000
$14,000
June 30 2016
10% * 1000000 * 1.10-1
90,909.09 * 1.88=$170,909.09
$28,090.90
June 30 2017
10% * 1000000 * 1.10-2
82,644.6 * 2.05
=$169,421.40
$29,578.6
June 30 2018
10% * 1000000 * 1.10-3
75,131.5 * 2.00
=$150,263
$48,737
Total Gain
$120,406.50
Date
Amount
PV
Exchange Value(EV)
Gain (loss) =(EV-PV)
July 1,2015
10% * 1,000,000* 1.100
100,000* 1.85
=$185,000
10%*1000000 * 1.85
=$185,000
0
June 30 2016
10% * 1000000 * 1.10-1
90,909.09 * 1.88=$170,909.09
10% * 1000000 * 1.88
=$188,000
$17,090.91
June 30 2017
10% * 1000000 * 1.10-2
82,644.6 * 2.05
=$169,421.40
10%* 1000000 * 2.05
=$205,000
$35,578.60
June 30 2018
10%* 1000000 * 1.10-3
75,131.5 * 2.00
=$150,263
10% * 1000000 * 2.00
=$200,000
$49,737
Total Gain
$102,406.51
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