P13-11 Importing and Exporting Transactions; Hedges of Exposed Foreign Currency Asset and Lia- bility Positions; Identifiable Foreign Currency Commitment; Speculative Forward Exchange Contract; Intervening Balance Sheet Date Reynolds Corporation has extensive dealings with foreign suppliers and buyers. During the first six months of the fiscal year 19X5, Reynolds reported the following foreign transactions, all of which are denominated in the local currency of the respec- tive foreign firm. Reynolds prepares financial statements on June 30 and December 31 of each year January Sold merchandise to Company T of Denmark for 200,000 kroner; payment is due in 60 days. The exchange rate at the time was S.15 per krone. On this date, Reynolds entered into a forward exchange contract with a local bank to sell 200,000 kroner to be delivered on March 1. The exchange rate for future delivery was $.14 15 Signed an agreement with Company U of India to purchase merchandise for 500,000 rupees; merchandise is to be delivered on August 1. The spot rate for the rupee was S.18. To avoid the risk of fluctuation in foreign exchange rates, Reynolds entered into a forward exchange contract to re ceive 500,000 rupees on August 1 at a current forward exchange rate of S.19. The forward exchange contract qualifies as a hedge of an identifiable foreign currency commitment. Any premium or discount on the forward exchange contract is deferred 25 Purchased equipment from Company V of Canada for 50,000 Canadian dollars when the exchange rate was $.98 for the Canadian dollar. The in- voice price is to be paid on March 25. March Received payment from Company T of Denmark. Delivered 200,000 kro- ner to the bank in accordance with terms of the forward exchange contract (January 1 transaction). The spot rate for the krone on March 1 was S.16. 25 Paid in full Company V of Canada. The exchange rate for the Canadian dollar was $1.02 on this date. May Entered into a forward exchange contract to speculate in British pounds. Terms of the forward exchange contract call for Reynolds to purchase 30,000 British pounds for delivery in three months. The current spot rate for the British pound was $1.75, and the three-month future rate was $1.72. 20 Sold merchandise to Company W of France for 200,000 French francs: FOREIGN CURRENCY TRANSACTIONS 681 payment is due in one month. The current exchange rate for the frane was $.20 Purchased merchandise from Company X of Mexico for 1,000,000 pesos. The exchange rate for the peso was S.06. The invoice price is to be paid on August I June 20 Received full settlement from Company W of France. On this date, the exchange rate for the franc was $.19. REQUIRED a) Prepare entries on the books of Reynolds Corporation to record the preceding transactions b) Prepare entries on the books of Reynoids Corporation to value properly the accounts receivable and payable for midyear financial statements of June 30, 19X5, assuming the current exchange rates were as foilows: Rupce Peso One-month forward rate for British pound $ .20 .05 1.70
