Asked by Jordan Parker on May 01, 2024
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Compucat is a Canadian manufacturing company that produces inexpensive personal and laptop computers. The company has been generating progressively more of its sales from foreign markets. During 2019, the company started purchasing most of its components from a supplier in Germany.
To deal with the uncertainty associated with foreign exchange fluctuations, all of Compucat's foreign currency denominated receivables and payables are hedged with contracts with the company's bank. Compucat's year-end is on December 31. The following transactions took place in 2019:
On September 1, 2019, Compucat purchased components from its German supplier for 100,000 Euros. On that date AMC entered into a forward contract for 100,000 Euros at the 60 day forward rate of 1 Euro = CDN$1.50. The forward contract was designated as a fair value hedge of the amount payable to the German supplier. Compucat settled with the bank and paid its supplier in full on December 1, 2019.
On December 1, 2019 Compucat also shipped a batch of laptop computers to an American client for US$250,000. The invoice required that Compucat receive its payment in full by January 31, 2019. On the date of the sale, the company entered into a forward contract for US$250,000 at the two-month forward rate of US$1 = CDN$1.25. This forward contract was designated to be a fair value hedge of the amount due from the American customer.
The dates and exchange rates relevant to these transactions are shown below.
Spot rate Forward rate September 1, 2019: 1 Euro = CDN $1.48751 Euro = CDN $1.5000 December 1,2019:1 Euro = CDN $1.48001 Euro = CDN $1.4800US$1=CDN$1.2600US$1=CDN$1.2500 December 31,2019:US$1=CDN$1.2700US$1=CDN$1.2600\begin{array}{|l|r|r|} \hline& \text { Spot rate } & \text { Forward rate } \\\hline \text { September 1, 2019: } & 1 \text { Euro }=\text { CDN } \$ 1.4875 & 1 \text { Euro }=\text { CDN } \$ 1.5000 \\\hline \text { December } 1,2019: & 1 \text { Euro }=\text { CDN } \$ 1.4800 & 1 \text { Euro }=\text { CDN } \$ 1.4800 \\\hline & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.2600 & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.2500 \\\hline \text { December } 31,2019: & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.2700 & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.2600\\\hline\end{array} September 1, 2019: December 1,2019: December 31,2019: Spot rate 1 Euro = CDN $1.48751 Euro = CDN $1.4800US$1=CDN$1.2600US$1=CDN$1.2700 Forward rate 1 Euro = CDN $1.50001 Euro = CDN $1.4800US$1=CDN$1.2500US$1=CDN$1.2600 Prepare the 2019 journal entries to record the above transactions assuming Compucat uses the gross method. In addition, prepare any adjusting journal entries that you deem necessary.
Foreign Exchange Fluctuations
Variations in the value of one currency relative to another, impacting international trade and investments.
Spot Rate
The current market price for immediately exchanging one currency for another.
Forward Contract
A binding financial agreement to buy or sell an asset at a predetermined future date and price.
- Prepare journal entries and balance sheet presentations for foreign currency transactions and hedges.
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tatyana bookerMay 08, 2024
Final Answer :
September 1, 2019 Debit Credit Inventory $148,750 Accounts Payable (Euros) $148,750[100,000 Euros ×1.4875 spotrate CDN$148,750] Receivable from bank (Euros) $150,000 Payable to Bank $150,000[100,000 Euros ×1.50 forward rate = CDN$150,000] December 1, 2019 Accounts Receivable (US$) $315,000 Sales $315,000[US$250,000×1.26 spot rate =CDN$315,000] Receivable from Bank $312,500 Payable to Bank (US $ ) $312,500[ US $250,000×1.25 forward rate = CDN $312,500] Accounts payable $750 Exchange gain $750[100,000 Euros ×(1.4875 September 1 spot rate −1.48 December 1 spotrate ) Exchange loss $2,000 Receivable from bank $2,000100,000 Euros ×(1.50 September 1 forward rate −1.48 December 1 spot/forward rate) ] Payable to Bank $150,000 Cash $150,000 Cash (Euros) $148,000 Receivable from bank $148,000[100,000 Euros ×1.48] Accounts Pavable $148,000\begin{array}{|l|r|r|}\hline \text { September 1, 2019 } & \text { Debit } & \text { Credit } \\\hline \text { Inventory } & \$ 148,750 & \\\hline \text { Accounts Payable (Euros) } & & \$ 148,750 \\\hline[100,000 \text { Euros } \times 1.4875 \text { spotrate } & & \\\text { CDN\$148,750] } & & \\\hline \text { Receivable from bank (Euros) } & \$ 150,000 \\\hline \text { Payable to Bank } & & \$ 150,000 \\\hline[100,000 \text { Euros } \times 1.50 \text { forward rate }= & & \\\text { CDN\$150,000] } & & \\\hline \text { December 1, } 2019 & & \\\hline \text { Accounts Receivable (US\$) } & \$ 315,000 & \\\hline \text { Sales } & & \$ 315,000 \\\hline[\mathrm{US} \$ 250,000 \times 1.26 \text { spot rate }= & \\\mathrm{CDN} \$ 315,000] & \\\hline \text { Receivable from Bank } & \$ 312,500 \\\hline \text { Payable to Bank (US } \$ \text { ) } & & \$ 312,500 \\\hline[\text { US } \$ 250,000 \times 1.25 \text { forward rate }= & & \\\text { CDN } \$ 312,500] & & \\\hline \text { Accounts payable } & \$ 750 \\\hline \text { Exchange gain } & & \$ 750 \\\hline[100,000 \text { Euros } \times(1.4875 \text { September } 1 \text { spot } & & \\\text { rate }-1.48 \text { December } 1 \text { spotrate })\\\hline \text { Exchange loss } & \$ 2,000 \\\hline \text { Receivable from bank } & & \$ 2,000 \\\hline \begin{array}{l}100,000 \text { Euros } \times(1.50 \text { September } 1 \text { forward } \\\text { rate }-1.48 \text { December } 1 \text { spot/forward rate) }]\end{array} & & \\\hline \text { Payable to Bank } & \$ 150,000 & \\\hline \text { Cash } & & \$ 150,000 \\\hline \text { Cash (Euros) } & \$ 148,000 & \\\hline \text { Receivable from bank } & & \$ 148,000 \\\hline[100,000 \text { Euros } \times 1.48] & & \\\hline \text { Accounts Pavable } & \$ 148,000 & \\\hline\end{array} September 1, 2019 Inventory Accounts Payable (Euros) [100,000 Euros ×1.4875 spotrate CDN$148,750] Receivable from bank (Euros) Payable to Bank [100,000 Euros ×1.50 forward rate = CDN$150,000] December 1, 2019 Accounts Receivable (US$) Sales [US$250,000×1.26 spot rate =CDN$315,000] Receivable from Bank Payable to Bank (US $ ) [ US $250,000×1.25 forward rate = CDN $312,500] Accounts payable Exchange gain [100,000 Euros ×(1.4875 September 1 spot rate −1.48 December 1 spotrate ) Exchange loss Receivable from bank 100,000 Euros ×(1.50 September 1 forward rate −1.48 December 1 spot/forward rate) ] Payable to Bank Cash Cash (Euros) Receivable from bank [100,000 Euros ×1.48] Accounts Pavable Debit $148,750$150,000$315,000$312,500$750$2,000$150,000$148,000$148,000 Credit $148,750$150,000$315,000$312,500$750$2,000$150,000$148,000
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Cash $148,000[100,000 Euros ×1.48] December 31, 2019 $2,500 Accounts receivable Exchange gains $2,500[ US $250,000×(1.26 December 1 spotrate - 1.27 December 31 spotrate )] Exchange loss $2,500 Payable to Bank $2,500[US$250,000×(1.25 December 1 forward rate −1.26 December 31 forward rate )\begin{array}{|l|r|r|}\hline {\text { Cash }} & & \$ 148,000 \\\hline[100,000 \text { Euros } \times 1.48] & & \\\hline \text { December 31, 2019 } & \$ 2,500 & \\\hline \text { Accounts receivable } & & \\\hline{\text { Exchange gains }} & & \$ 2,500 \\\hline[\text { US } \$ 250,000 \times(1.26 \text { December 1 spotrate - } & & \\1.27 \text { December 31 spotrate })] & & \\\hline \text { Exchange loss } & \$ 2,500 \\\hline \text { Payable to Bank } & &\$ 2,500 \\\hline[\mathrm{US} \$ 250,000 \times(1.25 \text { December } 1 \text { forward } & \\\text { rate }-1.26 \text { December } 31 \text { forward rate })\\\hline\end{array} Cash [100,000 Euros ×1.48] December 31, 2019 Accounts receivable Exchange gains [ US $250,000×(1.26 December 1 spotrate - 1.27 December 31 spotrate )] Exchange loss Payable to Bank [US$250,000×(1.25 December 1 forward rate −1.26 December 31 forward rate )$2,500$2,500$148,000$2,500$2,500
\quad
Cash $148,000[100,000 Euros ×1.48] December 31, 2019 $2,500 Accounts receivable Exchange gains $2,500[ US $250,000×(1.26 December 1 spotrate - 1.27 December 31 spotrate )] Exchange loss $2,500 Payable to Bank $2,500[US$250,000×(1.25 December 1 forward rate −1.26 December 31 forward rate )\begin{array}{|l|r|r|}\hline {\text { Cash }} & & \$ 148,000 \\\hline[100,000 \text { Euros } \times 1.48] & & \\\hline \text { December 31, 2019 } & \$ 2,500 & \\\hline \text { Accounts receivable } & & \\\hline{\text { Exchange gains }} & & \$ 2,500 \\\hline[\text { US } \$ 250,000 \times(1.26 \text { December 1 spotrate - } & & \\1.27 \text { December 31 spotrate })] & & \\\hline \text { Exchange loss } & \$ 2,500 \\\hline \text { Payable to Bank } & &\$ 2,500 \\\hline[\mathrm{US} \$ 250,000 \times(1.25 \text { December } 1 \text { forward } & \\\text { rate }-1.26 \text { December } 31 \text { forward rate })\\\hline\end{array} Cash [100,000 Euros ×1.48] December 31, 2019 Accounts receivable Exchange gains [ US $250,000×(1.26 December 1 spotrate - 1.27 December 31 spotrate )] Exchange loss Payable to Bank [US$250,000×(1.25 December 1 forward rate −1.26 December 31 forward rate )$2,500$2,500$148,000$2,500$2,500
Learning Objectives
- Prepare journal entries and balance sheet presentations for foreign currency transactions and hedges.