Zimmer Corporation, a U.S. firm, purchased merchandise from Taisho Company of Ja

Question

Zimmer Corporation, a U.S. firm, purchased merchandise from Taisho Company of Japan on November 1, 2008, for 10, 000, 000 yen, payable on December 1, 2008. The spot rate for yen on November 1 was $0.0075, and on December 1 the spot rate was $0.0076. Did the dollar weaken or strengthen against the yen between November 1 and December 1, 2008? Explain. On November 1, 2008. at what amount did Zimmer record the account payable to Taisho? On December 1, 2008, Zimmer paid the 10, 000, 000 yen to Taisho. Prepays the journal entry to record settlement of the account on Zimmer's books. If Zimmer had chosen to hedge its exposed net liability position on November 1, would it have entered; a forward contract to purchase yen for future receipt or to sell yen for future delivery? Explain.

Explanation / Answer

1) The dollar weakened against yen between November 1 and December 1 This is because in November 1 , yen was fetching $ 0.0075 and in December it was fetchng $0.0076 which mens that 1 yen was getting more dollars which means dollar has weakened 2) immer recorded the account payable on November 1, 2008 at 10000000 *0.0075 = $ 75000 3) Accounts payable Dr 75000 Exchange rate fluctuation Dr 1000 (10000000*0.0001)             Cash Cr 76000 4) If Zimmer would have choen to hedge its net liability , it would hve enteres into a forward contract to purchase yen for future receipt as the liability is to be paid in yen and the dollar had weakened

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