Ch 7 Q2

Foreign currency receivable resulting from export sales are revalued at the end of accounting
periods using the current spot rate. An increase in the value of a receivable will be offset by
reporting a foreign exchange gain in net income , and a decease will be offset by a foreign
exchange loss. Foreign exchange gains and losses are accrued even though they have not yet
been realized.

E7-13
Journal entries related to this foreign currency borrowing
September 30th Yr 1
December 31st Yr 1

September 30th Yr 2

December 31st Yr 2

September 30th Yr 3

Cash
Note Payable (1,000,000 markkas*.20)

$200,000

Interest Expense
Interest Payable
(1,000,000 markkas *2%*3/12*$.21)

$,1050

Foreign Exchange loss

Note Payable
(1,000,000 markkas (*$.21-$.20))

$10,000

Interest Expense (15,000 markkas *$.23)

Interest Payable
Foreign Exchange loss(15,000 markkas
(*$.23-$.21))
Cash

$3,450
1,050
100

Interest Expense
Interest Payable
(50,000 markkas *$.24)

$1,200

Foreign Exchange loss

Note Payable
(1,000,000 markkas (*$.24-$.21))

$30,000

Interest Expense (15,000 markkas *$.27)

Interest Payable
Foreign Exchange loss(5,000 markkas
(*$.27-$.24))
Cash

$4,050
1,200
150

$200,000
$1,050

$10,000

$4,600
$1,200

$30,000

$5,400

Note Payable
Foreign Exchange loss
Cash(1,000,000 markkas *$.27)

$240,000
30,000
$270,000

Effective cost of borrowing in dollars in each of the three years 1 2 and 3

Year 1
Interest Expense $1,050
Foreign exchange Loss 10000
Total = 5.525% for 3 Months ($11,050/$200,000)
Year 2
Interest Expense $4,650
Foreign exchange Loss 30,100
Total = 17.375% for 12 Months ($34,750/$200,000)
Year 3
Interest Expense $4,050
Foreign exchange Loss 30,150
Total = 17.1% for 9 Months ($34,200/$200,000)
Because of appreciation in the value of the markka, effective annual borrowing costs range from
17.4%-22.8%
The net cash flow this borrowing is
Cash outflow = Interest $10,000 Principal $270,000 Total = $280,000
Cash Inflow= Borrowing $200,000 Net cash outflow $80,000

E7-16
Date
11/01/Y1
12/31/Y1
4/30/Y2

Rate
$.23
$.20
$.19

Value
$23,000
$20,000
$19,000

$ Value
-$3000
-$1000

4/30/Y2
$.22
$.18
-

Fair Value
$0
$3,884
$3,000

Fair Value
+$3,844
-$ 844

$22,000-$18,000=$(4000)*.961=$3,844
$22,000-$19,000=$3,000
Y1 Journal Entries
11/01/Y1

Account Receivable

$23,00
0

Sales
12/31/Y1

$23,00
0

Foreign Exchange Loss

Account Receivable
Accumulated other comprehensive income
Gain on forward contract
Forward Contract
Accumulated other comprehensive income
Discount Expense

$3,000
$3,000
$3,000
$3,000
$3,844
$3,844
$333.3
3

Accumulated other comprehensive income

$333.3
3

The Impact of net income for Year 1

Sales
Foreign Exchange loss
Gain on forward Contract
Net gain
Discount Expense
Impact on net income

$23,000
(3,000)
$3,000
0
(333.33)
$22,666.6
7

Year 2 Journal entries

4/30/Y2

Foreign Exchange Loss

Account Receivable
Accumulated other comprehensive income
Gain on forward contract
Accumulated other comprehensive income
Forward Contract
Discount Expense
Accumulated other comprehensive income
Foreign Currency
Account Receivable
Cash
Foreign Currency
Forward Contract

The Impact of net income for Year 2

Foreign Exchange loss
Gain on forward Contract

(1,000)
$1,000

$1,000
$1,000
$1,000
$1,000
$844
$844
$666.67
$666.67
$19,000
$19,000
$22,000
$19000
$3,000

Net gain(loss)
Discount Expense
Impact on net income

0
(666.67)
(666.67)