Advanced Accounting II Chapter 12-Foreign Currency Transactions Problem 1. Bell

Question

Advanced Accounting II Chapter 12-Foreign Currency Transactions Problem 1. Bell Company was incorporated in 2015 and engaged in foreign currency transactions. The following exchange rates were quoted on the indicated dates: Forward Rate Spot Rate March 1 Delivery $1.5920 $1.5800 2-Nov-2017 $1.6021 31-Dec-2017 $1.5820 1-Mar-2018 $1.6543 Bell Company's fiscal year-end is December 31. Required: A. Assume that on November 2, 2017 Bell recorded a sale of goods on account for £50,000 to be paid on March 1, 2018. Prepare the journal entries that would be made by Bell on November 2, December 31, and March 1 to record the sale, adjust the accounts related, and to record the receipt of the payment. B. Assume that On November 2, 2017, Bell entered into a forward contract to sell £50,000 for $1.5920 per pound on March 1, 2018. The contract was entered into to speculate in future exchange rate fluctuations. Prepare the journal entries that would be made by Bell on November 2, December 31, and March 1. C. Compute the effect of the transactions in (A) and (B) on the net income for the fiscal years ended December 31, 2017, and December 31, 2018.

Explanation / Answer

Problem-1(A) Journal Entry In the books of Bell Company Date Account Desription , Title Debit Credit 02/11/2017 Account Receivable $80,105.00 Sales $80,105.00 To Record Sales at Spot Rate (50000*$1.6021) 31/12/2017 Loss on Foreign Currency Transaction $1,005.00 Account Receivable $1,005.00 TO Record Fluctuation on Foreign Exchange Rate (1.6021-$1.5820)50000 01/03.2018 Cash ($1.6543*50000) $82,715.00 Account Receivable $79,100.00 Gain on Foreign Currency Transaction ($0.0723*50000) $3,615.00 To Reord Payment Received Problem-1(B) Journal Entry Date Account Desription , Title Debit Credit 02/11/2017 No Entry To Record selling a foraward Contract, charge should be paid 31/12/2017 Foreign Currency Forward Contract $500.00 Gain on Foreign Currency Transaction Amount $500.00 To Record Gain on Forward Contract ( $1.5920-$1.5820)*50000 01/03/2018 No Entry On settlement date Spot rate is $1.6543 where as Forward contract to sell was made for $1.5920. forward contract was taken for hedge and not exceuted due to not benfecial 1 ( C) Total Gain/(Loss) at balance sheet Date (-$1005+$500) ($505) Total Gain/(Loss) at settlement Date ($3615+0) $3,615

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