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Slide 12-2
Accounting for Foreign Currency Accounting for Foreign Currency Transactions and Hedging Foreign Transactions and Hedging Foreign Exchange RiskExchange Risk
Advanced Accounting, Fourth Edition
12121212
Slide 12-3
Many U.S. companies engage in international
activities such as:
Exporting or importing goods,
Establishing a foreign branch, or
Holding an equity investment in a foreign
company.
Foreign Currency TransactionsForeign Currency TransactionsForeign Currency TransactionsForeign Currency Transactions
Slide 12-4
Foreign Currency TransactionsForeign Currency TransactionsForeign Currency TransactionsForeign Currency Transactions
Recording and reporting problems with foreign currency transactions:
Transactions in a foreign currency must be translated before they can be aggregated with domestic transactions.
Receivables or payables denominated in foreign currencies are subject to gains and losses.
Companies use hedging strategies with derivatives to minimize the impact of exchange rate changes.
Slide 12-5
Exchange Rates—Means of TranslationExchange Rates—Means of TranslationExchange Rates—Means of TranslationExchange Rates—Means of Translation
Translation - process of expressing amounts stated in a foreign currency in the currency of the reporting entity by using an appropriate exchange rate.
Exchange rate - ratio between a unit of one currency and another currency for which that unit can be exchanged at a particular time.
Slide 12-6
Direct Exchange Rate
Units of domestic currency that can be converted Units of domestic currency that can be converted into into one unit of foreign currencyone unit of foreign currency..
Direct rate =Direct rate = 1.517 ($1.517 U.S. for 1 British 1.517 ($1.517 U.S. for 1 British pound)pound)
Indirect Exchange Rate
Units of foreign currency that can be converted Units of foreign currency that can be converted into into one unit of domestic currencyone unit of domestic currency..
Indirect rate = 1.00/1.517 = .6592 Indirect rate = 1.00/1.517 = .6592 ($1 U.S. for .6592 British pound)($1 U.S. for .6592 British pound)
Exchange Rates—Means of TranslationExchange Rates—Means of TranslationExchange Rates—Means of TranslationExchange Rates—Means of Translation
Slide 12-7
Spot Rate
Rate at which currencies can be exchanged today.Rate at which currencies can be exchanged today.
Forward or Future Rate
Rate at which currencies can be exchanged at Rate at which currencies can be exchanged at some future date.some future date.
Forward Exchange Contract
Contract to exchange currencies of different Contract to exchange currencies of different countries on a stipulated future date, at a countries on a stipulated future date, at a specified rate (the forward rate). specified rate (the forward rate).
Exchange Rates—Means of TranslationExchange Rates—Means of TranslationExchange Rates—Means of TranslationExchange Rates—Means of Translation
Slide 12-8
Floating Rates
Relationship between major currencies is Relationship between major currencies is
determined by supply and demand factors.determined by supply and demand factors.
Increase risk to companies doing business with a Increase risk to companies doing business with a
foreign company.foreign company.
Exchange Rates—Means of TranslationExchange Rates—Means of TranslationExchange Rates—Means of TranslationExchange Rates—Means of Translation
Transaction Change SettlementDate in Rate Date
Yen 100,000 100,000 Direct rate 0.00434$ 0.00625$ Payable 434.00$ 625.00$
Example – Payable to be settled in 100,000 yen
Slide 12-9
Transactions are normally measured and recorded in terms of the currency where the company is located.
Reporting Currency - usually the currency where the company located.
Measured Versus DenominatedMeasured Versus DenominatedMeasured Versus DenominatedMeasured Versus Denominated
LO 1 Measured versus denominated.LO 1 Measured versus denominated.
Transaction between a U.S. firm and a foreign company:
Companies negotiate whether settlement is to be made in dollars or in the foreign currency.
If settled by foreign currency, U.S. firm measures the receivable or payable in dollars, but the transaction is denominated in the foreign currency.
Slide 12-10
Foreign Currency Transaction - requires payment or receipt (settlement) in a foreign currency.
U.S. firm exposed to risk of unfavorable changes in the exchange rate.
Foreign Currency TransactionsForeign Currency TransactionsForeign Currency TransactionsForeign Currency Transactions
LO 2 Foreign Currency Transactions.LO 2 Foreign Currency Transactions.
Direct exchange rate increasing, or foreign
currency unit strengthening.
More dollars needed to acquire the foreign
currency units.
Direct exchange rate decreasing, or foreign
currency unit weakening.
Fewer dollars needed to acquire the foreign
currency units.
=
=
Slide 12-11
Foreign Currency TransactionsForeign Currency TransactionsForeign Currency TransactionsForeign Currency Transactions
LO 3 Common transactions.LO 3 Common transactions.LO 4 Three stages of concern.LO 4 Three stages of concern.
Translating Accounts Denominated in Foreign Currency
Importing or Exporting of Goods or Services
Transaction date
Settlement date
Balance sheet date
Units of foreign currency x Current direct exchange rate
Increase or decrease is generally reported as a foreign currency transaction gain or loss, sometimes referred to as an
exchange gain or loss, in determining net income for the current period.
Slide 12-12
Importing and Exporting TransactionsImporting and Exporting TransactionsImporting and Exporting TransactionsImporting and Exporting Transactions
LO 3 Common transactions.LO 3 Common transactions.LO 4 Three stages of concern.LO 4 Three stages of concern.
Exercise 12-2: During December of the current year, Teletex Systems, Inc., a company based in Seattle,Washington, entered into the following transactions:
Dec. 10 Sold seven office computers to a company located in Colombia for 8,541,000 pesos. On this date,
the spot rate was 365 pesos per U.S. dollar.
U.S. firm (Teletex)
Inventory delivered 12/10/2009
8,541,000 pesos received on 1/10/2010
Columbia firm
Slide 12-13
Importing and Exporting TransactionsImporting and Exporting TransactionsImporting and Exporting TransactionsImporting and Exporting Transactions
LO 3 Common transactions.LO 3 Common transactions.LO 4 Three stages of concern.LO 4 Three stages of concern.
Exercise 12-2: Dec. 10, Sold seven office computers to a company located in Colombia for 8,541,000 pesos. On this date, the spot rate was 365 pesos per U.S. dollar. Prepare the journal entry on the books of Teletex Systems, Inc.
Accounts receivable 23,400
Sales23,400
Sales price in pesos 8,541,000
Pesos per U.S. dollar / 365Sales price in U.S. dollars $ 23,400
Slide 12-14
Importing and Exporting TransactionsImporting and Exporting TransactionsImporting and Exporting TransactionsImporting and Exporting Transactions
LO 3 Common transactions. LO 4 Three stages of concern.LO 3 Common transactions. LO 4 Three stages of concern.
Exercise 12-2: Prepare journal entry necessary to adjust the accounts as of December 31. Assume that on December 31 the direct exchange rates was Colombia peso $.00268.
Transaction loss 510
Accounts receivable 510
Receivable in pesos 8,541,000
Direct exchange rate to U.S. dollar$ .00268Receivable in U.S. dollars $ 22,890Balance in receivable 23,400Transaction loss $ 510
Slide 12-15
Importing and Exporting TransactionsImporting and Exporting TransactionsImporting and Exporting TransactionsImporting and Exporting Transactions
LO 3 Common transactions. LO 4 Three stages of concern.LO 3 Common transactions. LO 4 Three stages of concern.
Exercise 12-2: Prepare journal entry to record settlement of the account on January 10. Assume that the direct exchange rate on the settlement date was Colombia peso $.00320.
Cash (8,541,000 x $.00320) 27,331
Accounts receivable ($23,400 - $510) 22,890
Transaction gain 4,441
Slide 12-16
Importing and Exporting TransactionsImporting and Exporting TransactionsImporting and Exporting TransactionsImporting and Exporting Transactions
LO 3 Common transactions.LO 3 Common transactions.LO 4 Three stages of concern.LO 4 Three stages of concern.
Exercise 12-2: During December of the current year, Teletex Systems, Inc., a company based in Seattle, Washington, entered into the following transactions:
Dec. 12 Purchased computer chips from a Taiwan company. Contract was denominated in 500,000 Taiwan dollars. Direct exchange rate on this date was $.0391.
U.S. firm (Teletex)
Inventory received 12/12/2009
500,000 Taiwan dollars paid on 1/10/2010
Taiwan firm
Slide 12-17
Importing and Exporting TransactionsImporting and Exporting TransactionsImporting and Exporting TransactionsImporting and Exporting Transactions
LO 3 Common transactions.LO 3 Common transactions.LO 4 Three stages of concern.LO 4 Three stages of concern.
Exercise 12-2: Dec. 12, Purchased computer chips from a company domiciled in Taiwan. The contract was denominated in 500,000 Taiwan dollars. The direct exchange spot rate on this date was $.0391. Prepare the journal entry on the books of Teletex Systems, Inc.
Inventory 19,550
Accounts payable19,550
Purchase price in Taiwan dollars 500,000
Direct exchange rate to U.S. dollar x $.0391Purchase price in U.S. dollars $ 19,550
Slide 12-18
Importing and Exporting TransactionsImporting and Exporting TransactionsImporting and Exporting TransactionsImporting and Exporting Transactions
LO 3 Common transactions. LO 4 Three stages of concern.LO 3 Common transactions. LO 4 Three stages of concern.
Exercise 12-2: Prepare journal entry necessary to adjust the account as of December 31. Assume that on December 31 the direct exchange rates was Taiwan dollar $.0351.
Accounts payable 2,000
Transaction gain 2,000
Payable in pesos 500,000
Direct exchange rate to U.S. dollar$ .0351Payable in U.S. dollars $ 17,550Balance in payable 19,550Transaction gain $ 2,000
Slide 12-19
Importing and Exporting TransactionsImporting and Exporting TransactionsImporting and Exporting TransactionsImporting and Exporting Transactions
LO 3 Common transactions. LO 4 Three stages of concern.LO 3 Common transactions. LO 4 Three stages of concern.
Exercise 12-2: Prepare journal entry to record settlement of account on January 10. Assume that the direct exchange rate on the settlement date was Taiwan dollar $.0398.
Transaction loss 2,350
Accounts payable ($19,550 - $2,000)17,550
Cash (500,000 x $.0398) 19,900
Slide 12-20
Importing and Exporting TransactionsImporting and Exporting TransactionsImporting and Exporting TransactionsImporting and Exporting Transactions
LO 3 Common transactions. LO 4 Three stages of concern.LO 3 Common transactions. LO 4 Three stages of concern.
Foreign currency transaction gains and losses are included in net income.
Importing or Exporting of Goods or Services
Slide 12-21
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