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Problem 6-1 (LO 5) FC transactions, commitments, forcasted transactions earnings impact. Jarvis Corporation transacts business with a number of foreign vendors and customers. These transactions are denominated in FC, and the company uses a number of hedging strategies to reduce the exposure to exchange rate risk. Several such transactions are as follows: Transaction A: On November 30, the company purchased inventory from a vendor in the amount of 100,000 FC with payment due in 60 days. Also on November 30, the company purchased a forward contract to buy FC in 60 days. Changes in the value of the commitment are based on changes in forward rates. Transaction B: On November 1, the company committed to provide services to a foreign customer in the amount of 100,000 FC. The services will be provided in 30 days. On November 1, the company also purchased a forward contract to sell 100,000 FC in 30 days. Transaction C: On November 1, the company forecasted a purchase of equipment in 30 days.The forecasted cost is 100,000 FC, and the equipment is to be depreciated over ve years using the straight-line method of depreciation. On November 1, the company acquired a forward contract to buy 100,000 FC in 30 days. Transaction D: On November 30, the company purchased an option to sell 100,000 FC in 60 days to hedge a forecasted sale to a customer in 60 days. The option sold for a premium of $1,200 and had a strike price of $1.155. The value of the option on December 31 was $2,000. The time value of all hedging instruments is excluded from the assessment of hedge effectiveness. Relevant spot and forward rates are as follows: Spot Rate Forward Rate for 30 Daysfrom November 1 Forward Rate for 60 Daysfrom November 30 November 1 .. . . . . ... .. .. .. 1 FC $1.12 1FC $1.132 November 15 . . . . . ... .. .. .. 1 FC $1.13 November 30 . . . . . ... .. .. .. 1 FC $1.15 1 FC $1.146 December 31.. . . . . ... .. .. .. 1 FC $1.14 1 FC $1.138 Assuming that the company's year-end is December 31, for each of the above transactions determine the current-year effect on earnings. All necessary discounting should be determined by using a 6% discount rate. For transactions C and D, the time value of the hedging instrument is excluded from hedge effectiveness and is to be separately accounted for. Problem 6-3 (LO 3, 5) Income statement effects of transactions, commitments, and hedging. Clayton Industries sells medical equipment worldwide. On March 1 of the current year, the company sold equipment, with a cost of $160,000, to a foreign customer for 200,000 euros payable in 60 days. At the same time, the company purchased a forward contract to sell 200,000 euros in 60 days. In another transaction, the company committed, on March 15, to deliver equipment in May to a foreign customer in exchange for 300,000 euros payable in June. This equipment is anticipated to have a completed cost of $210,000. On March 15, the company hedged the commitment by acquiring a forward contract to sell 300,000 in 90 days. Changes in the value of the commitment are based on changes in forward rates and all discounting is based on a 6% discount rate. Various spot and forward rates for the euro are as follows: Spot Rate Forward Rate for60 Days from March 1 Forward Ratefor 90 Daysfrom March15 March1.... .. . . . . ... .. .. .... .. . .. . $1.180 $1.181 March15 .. .. . . . . ... .. .. .... .. . .. . 1.181 1.180 $1.179 March31 .. .. . . . . ... .. .. .... .. . .. . 1.179 1.178 1.177 April30.... .. . . . . ... .. .. .... .. . .. . 1.175 1.174 Problem 61 Template Transaction A: Exchange Gain on Exposed Payable Loss on Forward Contract Total Transaction B: Gain on Commitment Loss on Forward Contract Adjustment to Basis of Sales Revenue Transaction C: Change in Time Value Depreciation Expense Reclassification of other comprehensive income as current earnings Time Value Total Transaction D: Change in Time Value Gain or (Loss (Loss) Problem 63 Template The Foreign Currency Transaction Part 1 Sales Cost of Goods Sold Gross Profit March 36000 160000 April Exchange Gain (Loss) Net Income Effect Part 2 The Hedge on the Foreign Currency Transaction Gain(Loss) on Forward Contract Net Income Effect Part 3 The Foreign Currency Commitment Gain or loss on Firm Commitment Net Income Effect Part 4 The Hedge on the Foreign Currency Commitment Number of FC Forward Rate Remaining Time1FC 1Mar 31Mar 30Apr 15Mar 31Mar 30Apr Fair Value of Original Contract Original Forward Rate Current Forward Rate Gain or (Loss) in Forward Rate Present Value of Change N=1 i= .5% N=0 i=.5% Change in Value From Prior Period Current Present Value Prior Present Value Change in Present Value Schedule B for Part 3 and 4 Number of FC Forward Rate Remaining Time1 FC Fair Value of Original Contract Original Forward Rate Current Forward Rate Gain or Loss in Forward Rate Present Value Change n=2.5 i=.5% n=1.5 i=.5% Current Change from Prior Period Current Present Value Prior Present Value Change in Present Value