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© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 15-3 Adjustment of Foreign Currency Transaction at the Balance Sheet Date On 12/1/02, Balloon Co., a US balloon manufacturer sells balloons to Maison Rue., a french company, for 20,000 french francs on credit. Payment is due in 90 days. The current exchange rate is $ per FF. Prepare Balloon Co.’s 12/1/02 journal entry. On 12/1/02, Balloon Co., a US balloon manufacturer sells balloons to Maison Rue., a french company, for 20,000 french francs on credit. Payment is due in 90 days. The current exchange rate is $ per FF. Prepare Balloon Co.’s 12/1/02 journal entry.
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© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide 15-1
GLOBAL BUSINESS AND ACCOUNTING
Lecture 14
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide 15-2 Adjustment of Foreign Currency
Transaction at the Balance Sheet Date
Occasionally, a transaction occurs in one fiscal period, but
cash is not received or paid until the next fiscal
period.At the balance sheet
date, any outstanding foreign currency
receivables or payables must be “remeasured”
using the spot rate available on the balance
sheet date.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide 15-3 Adjustment of Foreign Currency
Transaction at the Balance Sheet Date
On 12/1/02, Balloon Co., a US balloon manufacturer sells balloons to Maison Rue., a french company, for 20,000
french francs on credit. Payment is due in 90 days.The current exchange rate is $0.1575 per FF.Prepare Balloon Co.’s 12/1/02 journal entry.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide 15-4 Adjustment of Foreign Currency
Transaction at the Balance Sheet Date
On 12/1/02, Balloon Co., a US balloon manufacturer sells balloons to Maison Rue., a french company, for 20,000
french francs on credit. Payment is due in 90 days.The current exchange rate is $0.1575 per FF.Prepare Balloon Co.’s 12/1/02 journal entry.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide 15-5 Adjustment of Foreign Currency
Transaction at the Balance Sheet Date
On 12/31/02, the value of the foreign currency receivable must be adjusted based on the
12/31/02 spot rate of $0.1500 per FF.Adjust the original receivable:
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide 15-6 Adjustment of Foreign Currency
Transaction at the Balance Sheet Date
On 12/31/02, the value of the foreign currency receivable must be adjusted based on the
12/31/02 spot rate of $0.1500 per FF.Adjust the original receivable:
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide 15-7 Strategies to Avoid Losses from
Rate Fluctuations
Insist that the transaction is consumated in
your own currency (US $).
Hedging!
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide 15-8
The practice of minimizing or eliminating risk of loss associated with foreign currency fluctuations by using forward exchange rates to offset changes in spot rates.
Spot RatesThe exchange rates that are
available today.Forward Exchange Rates
The exchange rates that can be locked in today for expected
future exchange transactions.
Hedging
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide 15-9
This forward contract allows us to purchase 1,000,000 ¥ at a price
of $.0080 US in 30 days.
Good. If the spot rate is $.0090 US in 30 days,
we only have to pay $.0080 US, and we
avoid a $1,000 loss!
Hedging
A forward contract requires the purchase ofcurrency units at a future date at the
contracted exchange rate.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide 15-10
Record anddisclose all
paym ents, properor im proper.
Influencepeddling is
illegal.(1986 Am endm ent)
Facilitatingpaym ents are
not illegal.(1986 Am endm ent)
Bribery ofgovernm entofficials is
illegal.
M aintain anadequatesystem of
internal controls.
Foreign Corrupt PracticesAct of 1977
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide 15-11
When the ad said, When the ad said, ““Job with a hot Job with a hot
future!future!” this isn’t ” this isn’t exactly what I exactly what I
expected.expected.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide 15-12
Source: Adopted from McGraw-Hill/Irvin
