Executive stock options (ESOs) are used to provide incentives for executives to improve company performance. ESOs are usually granted "at-the-money," meaning that the exercise price of the options is set to equal the market price of the underlying stock on the grant date. Clearly, executives would prefer to be granted options when the stock price (and thus the exercise price) is at its lowest. Backdating options is the practice of choosing a past date when the market price was particularly low. Backdating has not, in the past, been illegal if no documents are forged, if communicated to the shareholders, and if properly reflected in earnings and in taxes.

1. Since backdating gives the executive an "instant" profit, why wouldn't the firm simply grant an option with the exercise price lower than the current market price?

2. Suppose the executive was not involved in backdating the ESOs. Does the executive face any ethical issues?

EXERCISE 12-6 Transaction Gain or Loss Agentel Corporation is a U.S.-based importing-exporting company. The company entered into the following transactions during the month of November. Nov. 6 Purchased merchandise from AGT, a Swiss firm, for 600,000 francs. 5 Sold merchandise to SLS, Inc., a firm located in Rio De Janeiro, for $200,000. 18 Sold merchandise to TNT, Ltd., a British firm, for 130,000 pounds. 20 Purchased merchandise from SDS, Ltd., a British firm, for $160,000. All the transactions were unsettled at December 31, Agentel's fiscal year-end. Spot rates are as follows: Currency Date Franc Real Pound November 6 $.490 $.412 $1.520 November 15 .487 .409 1.509 November 18 .476 .414 1.506 November 20 .468 .405 1.498 December 31 .460 .398 1.482 Required: A. Compute the amount that Agentel would report for each unsettled receivable and payable in its balance sheet prepared at December 31. B. Compute the transaction gain or loss on each unsettled receivable and payable that would be reported in the income statement prepared for the year ended December 31. EXERCISE 12-12 Forward Contract Hedge of an Importing Transaction On November 15, 2014, Solanski Inc. imported 500,000 barrels of oil from an oil company in Venezuela. Solanski agreed to pay 50,000,000 bolivars on January 15, 2015. To ensure that the dollar outlay for the purchase will not fluctuate, the company entered into a forward contract to buy 50,000,000 bolivars on January 15 at the forward rate of $.0269. Direct exchange rates on various dates were: Forward Rate Spot Rate 1/15 Delivery November 15 $.0239 $.0269 December 31 .0224 .0254 January 15 .0291 Solanski Inc. is a calendar-year company. Required: Compute the following: 1. The dollars to be paid on January 15, 2015, to acquire the 50,000,000 bolivars from the exchange dealer. 2. The dollars that would have been paid to settle the account payable had Solanski not hedged the purchased contract with the forward contract. 3. The discount or premium on the forward contract. 4. The transaction gain or loss on the exposed liability related to the oil purchase in 2014 and 2015. 5. The transaction gain or loss on the forward contract in 2014 and 2015. PROBLEM 12-1 Journal EntriesExporting Transactions GAF manufactures electrical cells at its St. Louis facility. The company's fiscal year-end is September 30. It has adopted the perpetual inventory cost flow method to control inventory costs. The company entered into the following transactions during the month of September. All exchange rates are direct quotations. Date Transaction Billing Rate of Amount Exchange 17,341 pesos $1.1291 12,200 Pounds 1.6821 160,274 Krone .1450 2014 Sept. 5 Exported 10 electrical cells to a company located in Argentina. Cost per unit, $950. 9 Received raw materials ordered from a British company. The goods were shipped FOB destination and had not been recorded on the books of GAF, Inc. 14 Exported 12 electrical cells to a company domiciled in Norway. Cost per unit, $970. 30 End of fiscal year-end. Date Oct. Peso 1.1091 British pound 1.6911 Krone .1530 Transaction 5 Billing Rate of Amount Exchange Received full payment for the 10 units sold on September 5. 9 30 1.1190 Paid British company in full for raw materials purchased September 9. 1.5948 Received full payment for 12 units sold on September 14. .1440 Required: A. Prepare the journal entries required on the books of GAF to record the transactions and year-end adjustments. Round all computations to the nearest dollar. B. Based on the two exporting transactions listed above, complete the following table. Transaction Sept. 5 Sept. 14 1. Sales _______ _______ 2. Transaction gain (loss) _______ _______ 3. Sales _______ _______ 4. Transaction gain (loss) _______ _______ 5. Net effect on income for both years (Sum lines 1-4) _______ _______ 6. Cash received on settlement date _______ _______ September 30, 2014, year-end: September 30, 2015, year-end: PROBLEM 12-4 Journal EntriesExporting Transactions with Forward Contract Hedges Centennial Exchange of St. Louis, Missouri, imports and exports grains. The company has a September 30 fiscal year-end. The periodic inventory system and the weighted-average cost flow method are used by the company to account for inventory cost. The company negotiated the following transactions during 2014 (assume forward contracts exist for the krone and forint). Sept. 1 Sold 1,000,000 bushels of wheat to a Norwegian company for 16,500,000 krone. The account is to be settled on October 30. Sept. 1 The management of Centennial was concerned that the krone would decline in value. They therefore entered into a forward contract to sell 16,500,000 Krone on October 30 for $.1442 per krone. Sept. 5 Sold 1,000,000 bushels of wheat to a Tokyo company for $5,300,000. The account is to be settled on November 5. Sept. 15 Purchased grain from an exporting company that operates in Hungary. The contract provides for the payment of 20,000,000 forint on October 15. Sept. 15 Entered into a forward contract to buy 20,000,000 forint on October 15 for $.006490 per Forint. Sept. 18 Sold 500 tons of soybean meal to Able & Born, Ltd., a Toronto company, for 48,000 Canadian dollars. The account is to be settled on December 17. Oct. 15 Completed the forward contract to buy 20,000,000 forint and then submitted payment to pay for the grain purchased on September 15. Oct. 30 Received 16,500,000 Krones from the Norwegian customer and settled forward contract. Nov. 5 Received payment in full for the wheat sold on September 5 to the Tokyo company. Dec. 17 Received payment from Able & Born, Ltd. for the September 18 sale. Direct exchange quotations for specific dates are presented below: NorwayKrone JapanYen HungaryForint CanadaDollar September 1 September 5 September 15 September 18 September 30 $.1480 .1458 .1456 .1456 .1455 $.00738 .00740 .00741 .00737 .00736 $.006427 .006428 .006430 .006431 .006433 $.8250 .8248 .8246 .8245 .8243 October 15 October 30 November 5 December 17 .1458 .1457 .1456 .1453 .00734 .00732 .00730 .00731 .006435 .006370 .006439 .006438 .8241 .8241 .8244 .8250 On September 30, the forward rate for krone (with an October 30 settlement) was $.1450 and the forward rate for forints (with an October 15 settlement) was $.00640. Required: Prepare journal entries, including year-end adjustments, to record the above transactions. Executive stock options (ESOs) are used to provide incentives for executives to improve company performance. ESOs are usually granted \"at-the-money,\" meaning that the exercise price of the options is set to equal the market price of the underlying stock on the grant date. Clearly, executives would prefer to be granted options when the stock price (and thus the exercise price) is at its lowest. Backdating options is the practice of choosing a past date when the market price was particularly low. Backdating has not, in the past, been illegal if no documents are forged, if communicated to the shareholders, and if properly reflected in earnings and in taxes. 1. Since backdating gives the executive an \"instant\" profit, why wouldn't the firm simply grant an option with the exercise price lower than the current market price? 2. Suppose the executive was not involved in backdating the ESOs. Does the executive face any ethical issues