Foreign Purchases, Sales Transactions, and Foreign Currency Hedging
M Company has the following export and import transactions during 20X5:
- On March 1, M sold goods to a Canadian Company for C$30,000, receivable on May 31. The spot rates for the C$ were C$1 = $0.65 on March 1 and C$1 = $0.68 on May 31.
- On July 1, M signed a contract to purchase equipment from a Japanese Company for ¥500,000. The equipment was manufactured in Japan during August and was delivered to M on August 31 with payment due on October 29. The spot rates for the yen were: ¥1 = $0.102 on July 1; ¥1 = $0.104 on August 31; and ¥1 = $0.106 on October 29. The 60-day forward exchange rate on August 31, 20X5 was ¥1 = $0.0155.
- On November 16, M purchased inventory from a London-based company for £10,000, payable on January 15, 20X6. The spot rates for the pound were £1 = $1.65 on November 16; £1 = $1.63 on December 31; and £1 = $1.64 on January 15, 20X6. The forward rate on December 31, 20X5 for a January 15, 20X6 exchange was £1 = $1.645.
- Prepare journal entries to record M’s import and export transactions during 20X5 and 20X6.
- What amount of foreign currency transaction gain or loss would M report on its income statement for 20X5?
Assume that M used forward currency contracts to manage the foreign currency risks of all of its export and import transactions during 20X5.
- On March 1, 20X5, M, anticipating a weaker C$ on the May 31, 20X5 settlement date, entered into a 90-day forward contract to sell C$30,000 at a forward exchange rate of C$1 = $0.64. The forward contract was not designed as a hedge.
- On July 1, 20X5, M, anticipating a strengthening of the yen on the October 29, 20X5 settlement date entered into a 120-day forward contract to purchase ¥500,000 at a forward exchange rate of ¥1 = $0.105. The forward contract was designated as a fair value hedge of a firm commitment.
- On November 16, 20X5, M, anticipating a strengthening of the pound on the January 15, 20X6 settlement date entered into a 60-day undesignated forward exchange contract to purchase £10,000 at a forward exchange rate of £1 = $1.67.
- Prepare the journal entries required to record M’s foreign currency activities during 20X5 and 20X6.
- What amount of foreign currency transaction gain or loss would M report on its income statement for 20X5 if Parts I and II of this problem were combined?
- What amount of foreign currency transaction gain or loss would M report on its income statement for 20X6 if Parts I and II of this problem were combined?
Prepare and submit one Excel spreadsheet for this assignment. Use the following naming convention for your file: MyNamePortfolioProjectOption1. Use Excel formulas to make or evidence each of your calculations of all dollar amounts. Do not enter any dollar amounts directly in Excel, unless it is unavoidable for obvious reasons. Use the tab function at the bottom of the Excel file to complete the assignment and to show your answers to each Requirement in each Part, separately.
You must include a minimum of six credible academic or professional references as part of your Excel document submission including the FASB Codification supporting your journal entries where appropriate.