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Pumped Up company purchased equipment from Switzerland for 140,000 frances on December 16,20X7, with payment due on February 14, 20X8. On December 16, 20X7, Pumped
Pumped Up company purchased equipment from Switzerland for 140,000 frances 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. 1SFr= $0.68 December 31, 20X7 1SFr= 0.70 February 14, 20X8 1 SFr= 0.69 E11-10: Foreign Currency Transactions, Hedging, and Hedge Accounting Revisions: (1) Assume that Pumped Up Company purchased inventory, instead of equipment. (2) Assume that, on 3/1/X8, Pumped Up sold all the inventory bought for US$100,000 cash. Part 1: Forward contract is NOT designated as a hedge. a. Entries: Date Foreign Currency Transaction 12/16/X7 Forward Contract *Comment (for inventory purchase, show work below!) (for entering the FW contract, explain or show work below!) 12/31/X7 (for year-end adjustment show work below!) (for year-end adjustment, show work below!) 2/14/X8 (to revalue A/P (SFr), show work below! (to revalue forward contract, show work below) (to pay off A/P (SFr), show work below!) (to exercise forward contract, show work below!) 3/1/X8 (to exercise forward contract, show work belowl) 3/1/X8 111 (to record sale of inventory) b. Foreign currency transaction to be reported in Pumped Up's 20X7 income statement - Show work: c. Foreign currency transaction to be reported in Pumped Up's 20x8 income statement = Show work: d. Total foreign currency transaction to be reported for Pumped Up, 20x7 and 20XB combined = Show work: This amount is the same as the forward at 12/16/X7 Show work: e. Gross profit to be reported in Pumped Up's 20x8 income statement = Show work: f. Overall effect of these transactions on Pumped Up's net income in 20x7 and 20x8, combined = Show work: Part II: Forward contract is designated as a cash flow hedge. a. Entries: Date Hedged Item 12/16/X7 Hedging Instrument: Cash Flow Hedge *Com (for inventory purchase show work below!) (for entering the FW contract, explain or show work below!) 12/31/X7 (for year-end adjustment, show work below!) (for year-end adjustment, show work below!) (to offset FC TX G/L on hedged item) 2/14/X8 (to revalue A/P (SFr), show work below!) (to revalue forward contract, show work below!) (to offset FC TX G/L on hedged item) (to pay off A/P (SFr), show work below!) Ito exercise forward contract. show work below!) 3/1/X8 (to record sale of inventory, show work below!) b. Foreign currency transaction gain/loss to be reported in Pumped Up's 20x7 income statement = Explain: c. Foreign currency transaction gain/loss to be reported in Pumped Up's 20x8 income statement = Explain: d. Gross profit to be reported in Pumped Up's 20X8 income statement = Show work: e. Overall effect of these transactions on Pumped Up's net income in 20X7 and 20x8, combined = Show work: Hint: Overall effect on net income should be the same as your aswer for question "f" in Part I because at the "end", nothing is deferred in OCI. All gains or losses are realized. 11.11
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