Word Pro - EX3_Fall_2019
Problem 1
Oil producer forecasts to produce 500,000 ba
els of oil in the last quarter of 20x2. The
cu
ent spot price is $70.23 and expects the price to fall. Assume the following margin
equirements of $1,000 per contract and are traded in 1,000 ba
el units. Hedge
effectiveness is measured by the cumulative contract price change.
Given the following price information
Oil Producer, Inc.
Hedge Data
09/17 09/30 10/31 11/30 12/31
Spot Rate $60.86 $70.23 $70.75 $56.96 $49.52
October Futures XXXXXXXXXX
November Futures XXXXXXXXXX56.96
December Futures XXXXXXXXXX XXXXXXXXXX
This is a cash flow hedge of forecasted sale.
Required.
1. Journal entries for 20x2.
a. Supporting documentation
Problem 2
Chance, Inc purchased equipment from Ba
ie, Inc, an Australian company, for $385,400
AUD on June 15, 20x2, with payment due on August 15, 20x2. Chance, Inc has a June 30
fiscal year end. Chance purchased a 60-day forward contract to purchase $AUD at a
forward rate of AUD 1=$0.69. On June 30, 20x2, the forward rate for an exchange on
August 15, 20x2 is AUD 1=$0.693. The spot rates are June 15, 20x2, AUD 1=$0.67971,
June 30, 20x2, AUD 1=$0.677, July 31, 20x2 AUD 1=$0.682, August 15, 20x2 AUD
1=$0.71077.
Forward contract is not designated as a hedge but will function as a hedge.
Required.
1. Prepare journal entries for the purchase, intervening balance sheet dates, and payment
of obligation.
Problem 3
DJ, Inc issues a $100,000,000 variable interest rate note with interest of 5 year US
Treasury Bill plus 500 basis points. On the date of issue the US Treasury Bill Rate was
0.81%. The note pays interest on June 30 and December 31. Interest resets on the interest
payment date. Fixed rate on 01/01/x1 is 5.81%.
DJ, Inc believes interest rates will increase and desires to enter into a Interest Rate Swap
agreement to pay fixed.
Assume the entity qualifies for the Short-Cut Method and that swap has no value at
inception.
US Treasury 5 Year Bill Rates are
1/1/x1 0.81%
6/30/x1 1.40%
12/31/x1 1.58%
06/30/x2 1.70%
12/31/x2 1.64%
6/30/x3 1.63%
12/31/x3 1.70%
06/30/x4 1.17%
12/31/x4 1.96%
6/30/x5 1.77%
12/31/x5 2.18%
Required
1. Complete interest rate swap table presented and used in-class for the above interest
ate swap.
Problem 4
On January 2, 2004, P Company, a U.S.-based company, acquired for 2,000,000
SFr an 80% interest in SFr Company. On January 2, 2004 SFr Company reported
a retained earnings of 480,000 SFr. SFr's books are maintained in francs and
are in conformity with U.S. generally accepted accounting principles. Trial
alances of the two companies as of December 31, 2005, are presented here:
P SF
Cash $ 500,200 962,500
Accounts Receivable 516,400 660,000
Inventory-FIFO 627,800 1,037,500
Investment in SFr Company 297,806 0
Land 450,000 500,000
Buildings, net 610,000 550,000
Equipment, net 290,000 405,000
Accounts Payable (540, XXXXXXXXXX,000)
Short-Term Notes Payable (300, XXXXXXXXXX,750)
Bonds Payable (700, XXXXXXXXXX,000)
Common Stock (800, XXXXXXXXXX,000)
Additional Paid-In Capital (300, XXXXXXXXXX,000)
Retained Earnings (542, XXXXXXXXXX,000)
Dividends 200,000 375,000
Sales (4,200,000) (3,775,000)
Equity Income (53,328) 0
Cost of Goods Sold 2,720,000 2,312,500
Other Expense 914,000 818,750
Depreciation Expense 210,000 125,000
Income Tax Expense 100,000 102,500
Other Information
1. Beginning Inventory of 830,000 francs was acquired when the exhange rate was $.165.
2. Purchases made uniformly thoughout 2005 were 2,520,000 SFr.
3. The Swiss Franc is identified as the subsidiary's functional cu
ency.
4. The subsidary's retained earnings (01/01/05) and cummulative translation adjustment
(credit) in dollars were $75,948 and $36,462, respectively.
5. All plant assets were acquired before the parent obtained a controlling interest in SFr.
6. Sales and expenses are earned and incu
ed evenly throughout the year.
7. Ending inventory was acquired in the last quarter.
8. Subsidary declared and paid dividends of 375,000 SFr on September 2.
9. The following direct exchange rate quotations were available
Date of acquisition $ 0.150
Average for XXXXXXXXXX
January 1, XXXXXXXXXX
September 2, XXXXXXXXXX
December 31, XXXXXXXXXX
Average for 4th Quarter XXXXXXXXXX
Average for XXXXXXXXXX
10. Assume an exposed net monetary liability position on 01/01/05 of 637,000 SFr.
11. Purchase differential of 608,000 SFr was allocated as follows:
Translation
SFr Rate Dollars
Land 308,000 $ XXXXXXXXXX,200
Building 300, XXXXXXXXXX,000
608,000 91,200
The building is depreciated over a 10-year remaining life using the straight-line
method of amortization.
12. Ignore defe
ed income tax issues.
Required
1. Prepare a translation worksheet for Local cu
ency as the functional cu
ency.
a. Prepare a schedule to verify the adjustment.
2. Prepare a translation worksheet for US Dollar is the functional cu
ency.
a. Prepare a schedule to verify the adjustment.