Advanced Accounting 11th Edition by Paul Fischer,William Tayler, Rita Cheng

Exercise 11

Income statement effects of transactions, commitments, and hedging. Clayton Industries sells medical equipment worldwide. On March 1 of the current year, the company sold equipment, with a cost of $160,000, to a foreign customer for 200,000 euros payable in 60 days. At the same time, the company purchased a forward contract to sell 200,000 euros in 60 days. In another transaction, the company committed, on March 15, to deliver equipment in May to a foreign customer in exchange for 300,000 euros payable in June. This equipment is anticipated to have a completed cost of $210,000. On March 15, the company hedged the commitment by acquiring a forward contract to sell 300,000 euros in 90 days. Changes in the value of the commitment are based on changes in forward rates, and all discounting is based on a 6% discount rate.
Various spot and forward rates for the euro are as follows:
For individual months ofMarch and April, calculate the income statement effect of:
1. The foreign currency transaction.
2. The hedge on the foreign currency transaction.
3. The foreign currency commitment.
4. The hedge on the foreign currency commitment.