16. On December 1, 2023, Venice Company (a U.S.
-based company) entered into a three-month for-
ward contract to purchase 1,000,000 pesos on March 1, 2024. The following U.S. dollar per peso
exchange rates apply:
Ignoring present values, determine whether Venice Company should report the forward contract as an
asset or as a liability on its December 31, 2023, balance sheet, and at what amount.
RESPONSE:
The forward contract is reported on the December 31 balance sheet as an asset. On December 1, the
company contracted to purchase pesos at $0.094 per peso. If it had waited until December 31 to enter
into the forward contract it would have contracted to purchase pesos at $0.098 per peso, which is
$0.004 more per peso. Therefore, the forward contract has a positive fair value and is an asset. The
undiscounted fair value of the forward contract on December 31 is $4,000 [($0.098-$0.094) x
1,000,000].
Venice Company should report the forward contract on its December 31, 2023, balance sheet as a
$4,000 asset.
17. Brandt Corp. (a U.S.-based company) sold parts to a South Korean customer on December 1,
2023, with payment of 10 million South Korean won to be received on March 31, 2024. The
following exchange rates apply:
25. Peerless Corporation (a U.S.-based company) made a sale to a foreign customer on September 15.
for 100,000 crowns. It received payment on October 15. The following exchange rates for I crown
apply:
Prepare all journal entries for Peerless Corporation in connection with this export sale, assuming that
the company closes its books on September 30 to prepare interim financial statements.
26. On December 15, 2023, Lisbeth, Inc. (a U.S.-based company), purchases merchandise inventory
from a foreign supplier for 50,000 schillings. Lisbeth agrees to pay in 45 days, after it sells the mer-
chandise. Lisbeth makes sales rather quickly and pays the entire obligation on January 25, 2024.
Currency exchange rates for 1 schilling are as follows:
Prepare all journal entries for Lisbeth Company in connection with this purchase and payment.
27. Voltac Corporation (a U.S.-based company) has the following import/export transactions
denominated in Mexican pesos in 2024:
March 1 Bought inventory costing 100,000 pesos on credit.
May 1 Sold 60 percent of the inventory for 80,000 pesos on credit.
August 1 Collected 70,000 pesos from customers.
September 1 Paid 60,000 pesos to suppliers.
Currency exchange rates for 1 peso for 2024 are as follows:
For each of the following accounts, what amount will Voltac report on its 2024 financial statements?
a. Inventory
b. Cost of Goods Sold
c. Sales
d. Accounts Receivable
e. Accounts Payable
f. Cash
28. On April 1, 2023, Mendoza Company (a U.S.-based company) borrowed 500,000 euros for one
year at an interest rate of 5 percent per annum. Mendoza must make its first interest payment on the
loan on October 1, 2023, and will make a second interest payment on March 31, 2024, when the
loan is repaid. Mendoza prepares U.S. dollar financial statements and has a December 31 year- end.
Prepare all journal entries related to this foreign currency borrowing, assuming the following
exchange rates for 1 euro:
31. Icebreaker Company (a U.S.-based company) sells parts to a foreign customer on December 1.
2023, with payment of 16,000 dinars to be received on March 1, 2024. Icebreaker enters into a for-
ward contract on December 1, 2023, to sell 16,000 dinars on March 1, 2024. The forward points on the
forward contract are excluded in assessing hedge effectiveness and are amortized to net income using
a straight-line method on a monthly basis. Relevant exchange rates for the dinar on various dates are
as follows:
Icebreaker must close its books and prepare financial statements at December 31.
a. Assuming that Icebreaker designates the forward contract as a cash flow hedge of a foreign cur-
rency receivable, prepare journal entries for the sale and foreign currency forward contract in U.S.
dollars. What is the impact on 2023 net income? What is the impact on 2024 net income? What is the
impact on net income over the two accounting periods?
b. Assuming that Icebreaker designates the forward contract as a fair value hedge of a foreign cur
rency receivable, prepare journal entries for the sale and foreign currency forward contract in U.S.
dollars. What is the impact on 2023 net Income? What is the impact on 2024 net income? What is the
impact on net income over the two accounting periods?
32. Use the same facts as in Problem 31 except that Icebreaker Company purchases materials from a
foreign supplier on December 1, 2023, with payment of 16,000 dinars to be made on March 1. 2024.
The materials are consumed immediately and recognized as cost of goods sold at the date of purchase.
On December 1, 2023, Icebreaker enters into a forward contract to purchase 16,000 dinars on March 1,
2024.
a. Assuming that Icebreaker designates the forward contract as a cash flow hedge of a foreign currency
payable, prepare journal entries for the import purchase and foreign currency forward contract in U.S.
dollars. What is the impact on 2023 net income? What is the impact on 2024 net income? What is the
impact on net income over the two accounting periods?
b. Assuming that Icebreaker designates the forward contract as a fair value hedge of a foreign currency
payable, prepare journal entries for the import purchase and foreign currency forward contract in U.S.
dollars. What is the impact on net income in 2023 and in 2024? What is the impact on net income over
the two accounting periods?
