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Journal Entries (Cash Flow Hedge)

On December 1, 20X8, Denizen Corporation entered into a 120-day forward contract to purchase 200,000 Canadian dollars (C$). Denizen’s fiscal year ends on December 31. The forward contract was to hedge an anticipated purchase of electronic goods on January 30, 20X9. The purchase took place on January 30, with payment due on March 31, 20X9. The derivative is designated as a cash flow hedge. The company uses the forward exchange rate to measure hedge effectiveness. The direct exchange rates follow:

  


Spot Rate


Forward Rate for   March 1, 20X9

 

December 1, 20X8


0.940


0.944

 

December 31, 20X8


0.945


0.947

 

January 30, 20X9


0.942


0.943

 

March 31, 20X9


0.941


Required:

Prepare all journal entries for Denizen Corporation.

Requirements:

  • Write      a paper of 4 pages in length, not counting the title and reference pages,      which you must include.
  • Use      terms, evidence, and concepts from class readings, including professional      business language.
  • Cite      at least 5 credible, academic or professional sources for this assignment,      outside of the textbook. Format your paper according to APA format.

Chapter 11 in Advanced Financial Accounting (pp. 548-573)

Covers foreign currency transactions, including foreign currency import and export transactions, managing international currency risk with foreign currency forward exchange financial instruments, derivatives designated as hedges, and managing an exposed foreign currency net asset or liability position that is not a designated hedging instrument.

Covers Foreign Currency Transactions and Financial Instruments all the way through Case 1, Managing an Exposed Foreign Currency Net Asset or Liability Position.

Chapter 11 PowerPoint Lecture 

Deloitte Global Services Limited. (2018). Key differences between the US GAAP and IFRS. Retrieved from https://www.iasplus.com/en-us/standards/ifrs-usgaap

Focus on the following subjects: derivatives: definitions and scope; and hedge accounting.

Financial Accounting Standards Board. (2017). Derivatives and hedging (Topic 815). Retrieved from http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176169282347&acceptedDisclaimer=true.

Read pp. 1-8, which summarize the 405-page document issued by the FASB.

PwC. (2018). IFRS and US GAAP: Similarities and differences. Retrieved from https://www.pwc.com/us/en/cfodirect/assets/pdf/accounting-guides/pwc-ifrs-us-gaap-similarities-and-differences.pdf

Read the following in Chapter 11: Section 11.1 through 11-3.

Use CTRL F and hit the search terms “cash flow hedge” and “fair value hedge” to find each place both hedges are discussed in Chapter 11.

Bogicevic, J. (2013). Accounting implications of foreign currency transactions translation and hedging. Ekonomski Horizonti, 15(2), 137-151.

Rashty, J., & O’Shaughnessy, J. (2012). Foreign currency forward contracts and cash flow hedging. The CPA Journal, 82(3), 22-27.

Bank for International Settlements. (2016). Triennial Central Bank survey: Foreign exchange turnover in April 2016. Retrieved from https://www.bis.org/publ/rpfx16fx.pdf

Doupnik, T. S., & Perera, H. (2015). International accounting (4th ed.). New York, NY: McGraw-Hill Publication.

Microsoft. (2017). Microsoft 2017 annual report. Retrieved from https://www.microsoft.com/en-us/Investor/sec-filings.aspx?year=2017&filing=annual

World Trade Organization. (2017). World Trade Statistical Review 2017. Retrieved from https://www.wto.org/english/res_e/statis_e/wt

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