Exercise B5-1: F-C Denominated Import Transactions
Coney Island Enterprises (a US based entity) enters into a transaction with Frankfurt Manufacturing (a German-based company) on December 1, 20X1, to purchase 100,000 units of an inventory item costing €10 each. Coney Island took possession of the inventory (i.e., title transfers) on December 1, with payment in Euros due on March 1, 20X2. Coney Island prepares quarterly financial statements, and its fiscal year end is December 31. The relevant exchange rates for the period from December 1, 20X1 to March 1, 20X2 are as follows:
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Date
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Spot Rate
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Forward
Rate to
3/1/20X2
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December 1, 20X1
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$1.32
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$1.305
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December 31, 20X1
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$1.33
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$1.316
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March 1, 20X2
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$1.30
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Required:
In the space provided on the next page, prepare the appropriate journal entries for Coney Island Enterprises.
Exercise B5-2: F-C Denominated Export Transactions
Coney Island Enterprises (a US based entity) enters into a transaction with Frankfurt Manufacturing (a German-based company) on December 1, 20X1, to sell 100,000 units of an inventory item costing €10 each. Coney Island shipped the inventory (i.e., title transfers) on December 1, with payment in Euros receivable on March 1, 20X2. Coney Island prepares quarterly financial statements, and its fiscal year end is December 31. The relevant exchange rates for the period from December 1, 20X1 to March 1, 20X2 are as included in the above-presented exchange-rate table.
Required:
In the space provided on the next page, prepare the appropriate journal entries for Coney Island Enterprises.
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B5-1: Import Transaction
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B5-2: Export Transaction
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Dr.
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Cr.
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Dr.
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Cr.
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12/01/20X1
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12/01/20X1
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12/31/20X1
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12/31/20X1
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03/01/20X2
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03/01/20X2
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Exercise B5-3: Forecasted Sales Transaction
Coney Island Enterprises (a US based entity) enters into a contract with Frankfurt Manufacturing (a German-based company) on December 1, 20X1, to sell 100,000 units of an inventory item costing €10 each. Coney Island will ship the inventory (i.e., title transfers) on March 1, 20X2, with payment in Euros receivable on the same date. Coney Island does recurring business with Frankfurt industries and Coney Island managers are virtually certain the transaction will take place as agreed. Coney Island prepares quarterly financial statements, and its fiscal year end is December 31. The relevant exchange rates for the period from December 1, 20X1 to March 1, 20X2 are as follows:
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Date
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Spot Rate
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Forward
Rate to
3/1/20X2
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December 1, 20X1
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$1.32
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$1.305
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December 31, 20X1
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$1.33
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$1.316
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March 1, 20X2
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$1.30
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Required:
In the space provided on the next page, prepare the appropriate journal entries for Coney Island Enterprises.
Exercise B5-4: Forecasted F-C Denominated “Firm Commitment”
Coney Island Enterprises (a US based entity) enters into a “firm commitment” (as that term is defined in FASB ASC 815) with Frankfurt Manufacturing (a German-based company) on December 1, 20X1, to sell 100,000 units of an inventory item costing €10 each. Coney Island will ship the inventory (i.e., title transfers) on March 1, 20X2, with payment in Euros receivable on the same date. Coney Island does recurring business with Frankfurt industries and the firm commitment includes significant monetary penalties for nonperformance, so Coney Island managers are virtually certain the transaction will take place as agreed. Coney Island prepares quarterly financial statements, and its fiscal year end is December 31. The relevant exchange rates for the period from December 1, 20X1 to March 1, 20X2 are as included in the above-presented exchange-rate table.
Required:
In the space provided on the next page, prepare the appropriate journal entries for Coney Island Enterprises.
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B5-3: Forecasted Transaction
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B5-4: “Firm Commitment”
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Dr.
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Cr.
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Dr.
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Cr.
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12/01/20X1
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12/01/20X1
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12/31/20X1
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12/31/20X1
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03/01/20X2
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03/01/20X2
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Exercise B5-5:
Coney Island Enterprises (a US based entity) enters into a transaction with Frankfurt Manufacturing (a German-based supplier) on December 1, 20X1, to sell 100,000 units of an inventory item costing €10 each. (This is the same transaction described in Exercise B5-2.) Coney Island shipped the inventory (i.e., title transfers) on December 1, with payment in Euros receivable on March 1, 20X2. Coney Island immediately negotiates a forward contract to sell Euros (for settlement on March 1) to shift the risk of exchange rate fluctuation to the exchange broker. (Specifically, the contract locks in the future US$ cash inflow to Coney Island at the forward rate on December 1 and requires Coney Island to deliver Euros at the spot rate on March 1.) Coney Island prepares quarterly financial statements, and its fiscal year end is December 31. Coney Island’s effective borrowing rate is 12 percent per annum. The relevant exchange rates and related balances for the period from December 1, 20X1 to March 1, 20X2 are as follows:
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Accounts Receivable (€)
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Forward Contract
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Date
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Spot Rate
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US$ Equiv
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Change in US$ Equiv.
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Forward
Rate to
3/1/20X2
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Derivative Fair Value
Dr. / (Cr)
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Change in Derivative Fair Value
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December 1, 20X1
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$1.32
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$1,320,000
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$1.305
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December 31, 20X1
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$1.33
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$1,330,000
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$10,000
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$1.316
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($10,783)*
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($10,783)
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March 1, 20X2
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$1.30
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$1,300,000
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($30,000)
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$5,000
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$15,783
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* $1,305,000 - $1,316,000 = ($11,000); discounted with a present value factor = 0.9803, which reflects monthly compounding for two months (i.e., 1/1.012).
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