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Posted on Jul 13, 2024

On November 1, 20X6, Smith Imports Inc. contracted to purchase teacups from England for 60,000. The teacups were to be delivered on January 30, 20X7,

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On November 1, 20X6, Smith Imports Inc. contracted to purchase teacups from England for 60,000. The teacups were to be delivered on January 30, 20X7, with payment due on March 1, 20x7. On November 1, 20X6, Smith entered into a 120-day forward contract to receive 60,000 pounds at a forward rate of 1 = $1.55. The forward contract was acquired to hedge the financial component of the foreign currency commitment. Additional Information for the Exchange Rate 1. Assume the company uses the forward rate in measuring the forward exchange contract and for measuring hedge effectiveness. 2. Spot and exchange rates follow: Date November 1, 20X6 December 31, 20X6 January 30, 20X7 March 1, 20X7 Spot Rate 1 = $ 1.60 1 = 1.63 1 = 1.55 1 = 1.545 Forward Rate for March 1, 2007 1 = $1.55 1 = 1.60 1 = 1.56 Required: b. Prepare all journal entries from November 1, 20X6, through March 1, 20X7, for the purchase of the teacups, the forward exchange contract, and the foreign currency transaction. Assume Smith's fiscal year ends on December 31, 20X6. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) No Date Debit Credit Answer is complete and correct. General Journal Foreign currency receivable from exchange broker (6) Dollars payable to exchange broker (5) 1 Nov. 1, 20X6 93,000 93,000 2 Dec 31, 20X6 3,000 Foreign currency receivable from exchange broker (5) Foreign currency transaction gain 3,000 3 Dec 31, 20X6 3,000 Foreign currency transaction loss Firm commitment OS 3,000 4 Jan. 30, 20X7 2,400 Foreign currency transaction loss Foreign currency receivable from exchange broker (5) >> 2,400 5 Jan. 30, 20X7 2,400 Firm commitment Foreign currency transaction gain O 2,400 6 Jan. 30, 20X7 92,400 Inventory (or Purchases) Firm commitment Accounts payable () 000 600 93,000 7 Mar. 1, 20X7 900 Foreign currency transaction loss Foreign currency receivable from exchange broker (6) 900 8 Mar. 1, 20X7 300 Accounts payable (6) Foreign currency transaction gain 300 9 Mar. 1, 20X7 93,000 Dollars payable to exchange broker (5) Cash >> 93,000 10 Mar. 1, 20X7 92,700 Foreign currency units (5) Foreign currency receivable from exchange broker (6) 92,700 11 Mar. 1, 20X7 92.700 Accounts payable () Foreign currency units () 92.700 c. Assume that Interest is significant and the time value of money is considered in valuing the forward contract and hedged commitment. Use a 12 percent annual Interest rate. Prepare all journal entries from November 1, 20X6, through March 1, 20x7, for the purchase of the teacups, the forward exchange contract, and the foreign currency transaction. Assume Smith's fiscal year ends on December 31, 20x7. (If no entry is required for a transaction/event, select "No journal entry required" In the first account field. Do not round Intermediate calculations.) No Date Debit Credit Answer is not complete. General Journal Foreign currency receivable from exchange broker (6) Dollars payable to exchange broker (5) 1 Nov. 1, 20X6 93,000 93,000 Dec. 31, 20X6 2.976 Foreign currency receivable from exchange broker (6) Foreign currency transaction gain O 2.977 x 3 Dec 31, 20X6 3,000 Foreign currency transaction loss Firm commitment Olo 3.000 4 Jan. 30, 20X7 2,400 Foreign currency transaction loss Foreign currency receivable from exchange broker (6) vo 2,400 5 Jan. 30, 20X7 2,400 Firm commitment Foreign currency transaction gain Olo 2,400 6 Jan. 30, 20X7 Inventory (or Purchases) Firm commitment Accounts payable (0) OO 93,000 7 Mar. 1, 20X7 300 Foreign currency transaction loss Foreign currency receivable from exchange broker (6) O 300 8 Mar. 1, 20X7 300 Accounts payable (6) Foreign currency transaction gain Olo 300 9 Mar. 1, 20X7 93,000 Dollars payable to exchange broker (S) Cash >> 93,000 On November 1, 20X6, Smith Imports Inc. contracted to purchase teacups from England for 60,000. The teacups were to be delivered on January 30, 20X7, with payment due on March 1, 20x7. On November 1, 20X6, Smith entered into a 120-day forward contract to receive 60,000 pounds at a forward rate of 1 = $1.55. The forward contract was acquired to hedge the financial component of the foreign currency commitment. Additional Information for the Exchange Rate 1. Assume the company uses the forward rate in measuring the forward exchange contract and for measuring hedge effectiveness. 2. Spot and exchange rates follow: Date November 1, 20X6 December 31, 20X6 January 30, 20X7 March 1, 20X7 Spot Rate 1 = $ 1.60 1 = 1.63 1 = 1.55 1 = 1.545 Forward Rate for March 1, 2007 1 = $1.55 1 = 1.60 1 = 1.56 Required: b. Prepare all journal entries from November 1, 20X6, through March 1, 20X7, for the purchase of the teacups, the forward exchange contract, and the foreign currency transaction. Assume Smith's fiscal year ends on December 31, 20X6. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) No Date Debit Credit Answer is complete and correct. General Journal Foreign currency receivable from exchange broker (6) Dollars payable to exchange broker (5) 1 Nov. 1, 20X6 93,000 93,000 2 Dec 31, 20X6 3,000 Foreign currency receivable from exchange broker (5) Foreign currency transaction gain 3,000 3 Dec 31, 20X6 3,000 Foreign currency transaction loss Firm commitment OS 3,000 4 Jan. 30, 20X7 2,400 Foreign currency transaction loss Foreign currency receivable from exchange broker (5) >> 2,400 5 Jan. 30, 20X7 2,400 Firm commitment Foreign currency transaction gain O 2,400 6 Jan. 30, 20X7 92,400 Inventory (or Purchases) Firm commitment Accounts payable () 000 600 93,000 7 Mar. 1, 20X7 900 Foreign currency transaction loss Foreign currency receivable from exchange broker (6) 900 8 Mar. 1, 20X7 300 Accounts payable (6) Foreign currency transaction gain 300 9 Mar. 1, 20X7 93,000 Dollars payable to exchange broker (5) Cash >> 93,000 10 Mar. 1, 20X7 92,700 Foreign currency units (5) Foreign currency receivable from exchange broker (6) 92,700 11 Mar. 1, 20X7 92.700 Accounts payable () Foreign currency units () 92.700 c. Assume that Interest is significant and the time value of money is considered in valuing the forward contract and hedged commitment. Use a 12 percent annual Interest rate. Prepare all journal entries from November 1, 20X6, through March 1, 20x7, for the purchase of the teacups, the forward exchange contract, and the foreign currency transaction. Assume Smith's fiscal year ends on December 31, 20x7. (If no entry is required for a transaction/event, select "No journal entry required" In the first account field. Do not round Intermediate calculations.) No Date Debit Credit Answer is not complete. General Journal Foreign currency receivable from exchange broker (6) Dollars payable to exchange broker (5) 1 Nov. 1, 20X6 93,000 93,000 Dec. 31, 20X6 2.976 Foreign currency receivable from exchange broker (6) Foreign currency transaction gain O 2.977 x 3 Dec 31, 20X6 3,000 Foreign currency transaction loss Firm commitment Olo 3.000 4 Jan. 30, 20X7 2,400 Foreign currency transaction loss Foreign currency receivable from exchange broker (6) vo 2,400 5 Jan. 30, 20X7 2,400 Firm commitment Foreign currency transaction gain Olo 2,400 6 Jan. 30, 20X7 Inventory (or Purchases) Firm commitment Accounts payable (0) OO 93,000 7 Mar. 1, 20X7 300 Foreign currency transaction loss Foreign currency receivable from exchange broker (6) O 300 8 Mar. 1, 20X7 300 Accounts payable (6) Foreign currency transaction gain Olo 300 9 Mar. 1, 20X7 93,000 Dollars payable to exchange broker (S) Cash >> 93,000