1-3 E11-10 Purchase with Forward Exchange Contract and Intervening Fiscal Year-End Pumped Up Company purchased equipment from Switzerland for 140,000 francs on December 16, 20X7, with payment due on February 14, 20X8. On December 16, 20X7, Pumped Up also acquired a 60-day forward contract to purchase francs at a forward rate of SFr 1 = $0.67. On December 31, 20X7, the forward rate for an exchange on February 14, 20X8, is SFr 1 = $0.695. The spot rates were December 16, 20X7 December 31, 20X7 February 14, 20X8 1 SFr = $0.68 1 SFr = 0.70 1 SFr = 0.69 *Comment 2 E11-10: Foreign Currency Transactions, Hedging, and Hedge Accounting 3 Revisions: (1) Assume that Pumped Up Company purchased inventory, instead of equipment. 4 (2) Assume that, on 3/1/X8, Pumped Up sold all the inventory bought for US$100,000 cash. 6 Part 1: Forward contract is NOT designated as a hedge. 7 a. Entries: 8 Date Foreign Currency Transaction Forward Contract 9 12/16/X7 10 11 (for inventory purchase, show work below!) (for entering the FW contract, explain or show work below!) 12 13 14 12/31/X7 15 16 (for year-end adjustment, show work below!) (for year-end adjustment, show work below!) 17 18 19 2/14/X8 20 21 (to revalue A/P (SFr), show work below!) (to revalue forward contract, show work below!) 22 23 24 25 (to pay off A/P (SFr), show work below!) 26 27 28 29 3/1/X8 (to exercise forward contract, show work below!) ILU LAIUJUJU VUIU LULU ZO 29 3/1/X8 30 31 32 33 (to record sale of inventory) 35 b. Foreign currency transaction to be reported in Pumped Up's 20x7 income statement = 36 Show work: 37 c. Foreign currency transaction to be reported in Pumped Up's 20X8 income statement = 38 Show work: 39 d. Total foreign currency transaction to be reported for Pumped Up, 20X7 and 20x8 combined = 40 Show work: 41 This amount is the same as the forward at 12/16/X7. 42 Show work: 43 e. Gross profit to be reported in Pumped Up's 20X8 income statement = 44 Show work: 45 f. Overall effect of these transactions on Pumped Up's net income in 20X7 and 20x8, combined = 46 Show work: Hedging Instrument: Cash Flow Hedge *Comment 48 Part II: Forward contract is designated as a cash flow hedge. 49 a. Entries: 50 Date Hedged Item 51 12/16/X7 52 53 (for inventory purchase, show work below! 54 (for entering the FW contract, explain or show work below!) 55 56 12/31/X7 57 58 59 (for year-end adjustment, show work below!) (for year-end adjustment, show work below!) 60 61 62 offset FC TX G/L on hedged item) 63 64 2/14/X8 65 (to revalue forward contract, show work below!) 66 (to revalue A/P (SFr), show work below!) 67 68 69 70 71 (to offset FC TX G/L on hedged item) 72 73 (to pay off A/P (SFr), show work below!) 74 75 to overciso forward contract shawwack below Assume that pumped up Company purchased Inventory, instead of equipment. c D E F G H L 64 27147 65 66 (to revalue A/P (SFr), show work below!) (to revalue forward contract, show work below!) 67 68 69 70 71 (to offset FC TX G/L on hedged item) 72 73 74 (to pay off A/P (SFr), show work below!) 75 (to exercise forward contract, show work below! 76 77 3/1/X8 78 79 80 81 82 (to record sale of inventory, show work below!) 83 84 86 b. Foreign currency transaction gain/loss to be reported in Pumped Up's 20x7 income statement = 87 Explain: 88 c. Foreign currency transaction gain/loss to be reported in Pumped Up's 20X8 income statement = 89 Explain: 90 d. Gross profit to be reported in Pumped Up's 20X8 income statement = 91 Show work: 92 e. Overall effect of these transactions on Pumped Up's net income in 20X7 and 20x8, combined = 93 Show work