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 2-Nov-2017 1.6021 31-Dec-2017 $1.5820 1-Mar-2018$1.6543 Spot Rate March 1 Delivery $1.5920 $1.5800 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

Solution A

Being payment received at Spot Rate

Solution B:-

Being payment received at Forward Contract Rate

Date Particular Debit Credit 2-Nov Customer A/C (50,000 X 1.6021) $      80,105.00 To Sales A/C $           80,105.00 Being Sales recorded at Spot Rate 1-Mar Bank A/C (50,000 X 1.6543) $      82,715.00 To Customer A/C $           80,105.00 To Foreign Exchange A/C $              2,610.00

Being payment received at Spot Rate

Solution B:-

2-Nov Customer A/C (50,000 X 1.5920) $      79,600.00 Foreign Exchange A/C (Balance) $            505.00 To Sales A/C (50,000 X 1.6021) $           80,105.00 Being Sales recorded at Forward Contract Rate 1-Mar Bank A/C (50,000 X 1.6543) $      79,600.00 To Customer A/C $           79,600.00

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