QUIZ

1. On November 1, 2010, Dorsey Company sold inventory to a company in England. The sale
was for 600,000 British pounds and payment will be received on February 1, 2011. On
November 1, Dorsey entered into a forward contract to sell 600,000 British pounds on
February 1 at the forward rate of $1.65. Spot rates for the British pound are as follows:
November 1 $1.61
December 31 1.67
February 1 1.62
Dorsey has a December 31 fiscal year-end.
Required:
Compute each of the following:
1. The dollars to be received on February 1, 2011, from selling the 600,000 pounds to the
exchange dealer.
2. The dollars that would have been received from the account receivable if Dorsey had not
hedged the sale contract with the forward contract.
3. The discount or premium on the forward contract.
4. The transaction gain or loss on the exposed asset related to the sale in 2010 and 2011.
5. The transaction gain or loss on the forward contract in 2010 and 2011.
2. On December 1, 2010, Derrick Corporation agreed to purchase a machine to be manufactured
by a company in Brazil. The purchase price is 1,150,000 Brazilian reals. To hedge against
fluctuations in the exchange rate, Derrick entered into a forward contract on December 1 to
buy 1,150,000 reals on April 1, the agreed date of machine delivery, for $0.375 per real. The
following exchange rates were quoted:
Forward Rate
Date Spot Rate (Delivery on 4/1)
December 1 0.390 0.375
December 31 0.370 0.373
April 1 0.385 --
Required:
Prepare journal entries necessary for Derrick during 2010 and 2011 to account for the
transactions described above.
3. On October 1, 2010, Nance Company purchased inventory from a foreign customer for
750,000 units of foreign currency (FCU) due on January 31, 2011. Simultaneously, Nance
entered into a forward contract for 750,000 units of FC for delivery on January 31, 2011, at
the forward rate of $0.75. Payment was made to the foreign customer on January 31, 2011.
Spot rates on October 1, December 31, and January 31, were $0.72, $0.73, and $0.76,
respectively. Nance amortizes all premiums and discounts on forward contracts and closes its
books on December 31.
Required:
A. Prepare all journal entries relative to the above to be made by Nance on October 1, 2010.
B. Prepare all journal entries relative to the above to be made by Nance on December 31,
2010.
C. Compute the transaction gain or loss on the forward contract that would be recorded in
2011. Indicate clearly whether the amount is a gain or loss.
4. On October 1, 2010, Kline Company shipped equipment to a foreign customer for a foreign
currency (FC) price of FC 3,000,000 due on January 31, 2011. All revenue realization criteria
were satisfied and accordingly the sale was recorded by Kline Company on October 1.
Simultaneously, Kline entered into a forward contract to sell 3,000,000 FCU on January 31,
2011 for $1,200,000. Payment was received from the foreign customer on January 31, 2011.
Spot rates on October 1, December 31, and January 31 were $0.42, $0.425, and $0.435,
respectively. Kline amortizes all premiums and discounts on forward contracts and closes its
books on December 31.
Required:
Prepare all journal entries relative to the above to be made by Kline during 2010 and 2011.