December 12, 2011 Bought inventory for 150,000 pesos on account. Invoice denominated in pesos.

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1 1) Johnson Corporation (a U.S. company) began operations on December 1, 2010, when the owner contributed $100,000 of his own money to establish the business. Johnson then had the following import and export transactions with unaffiliated Mexican companies: December 12, 2011 Bought inventory for 150,000 pesos on account. Invoice denominated in pesos. December 15, 2011 Sold 60% of inventory acquired on 12/12/11 for 120,000 pesos on account. Invoice denominated in pesos. January 1, 2012 Acquired and paid the 150,000 pesos owed to the Mexican supplier January 15, 2012 Collected the 120,000 pesos from the Mexican customer and immediately converted them into U.S. dollars The following exchange rates apply: Date Rate December 12 $.11 = 1 peso December 15 $.12 = 1 peso December 31 $.13 = 1 peso January 1 $.14 = 1 peso January 15 $.15 = 1 peso 1. What were Sales in the income statement for the year ended December 31, 2011? 2. What was the COGS associated with these sales? 3. What is the Accounts Payable balance in the balance sheet at December 31, 2011? 4. What is the Inventory balance in the balance sheet at December 31, 2011? 1. Sales = December 15 sale of 120,000 pesos at $.12 / peso = $14, COGS = 60% of inventory balance purchased 12/12/11 = 150,000 pesos $.11 = $16,500 60% = $9, Accounts Payable balance = 150,000 pesos $.13 = $19, Inventory balance = 150,000 pesos x $.11 = $16,500 40% remaining after sale = $6,600 Objective: LO5 2) Black Corporation (a U.S. company) began operations on January 1, 2011, when common stock was issued for $2,500,000. In the first two months of operations, Black had the following transactions: January 15, 2011 Bought inventory for 1000,000 Mexican pesos on account January 26, 2011 Sold 70% of inventory acquired on 1/15/11 for 440,000 Saudi riyals on account January 27, 2011 Paid $10,000 in other operating expenses February 2, 2011 Sold additional inventory that cost $10,000 for $30,000 cash to a U.S. company. February 15, 2011Acquired and paid the 1,000,000 pesos owed to the Mexican supplier

2 February 21, 2011Paid $15,000 in other operating expenses February 28, 2011Collected the 440,000 riyals from the Saudi customer and immediately converted them into U.S. dollars The following exchange rates apply: Date Rate Rate January 15 $.11 = 1 peso $.23 = 1 riyal January 26 $.12 = 1 peso $.24 = 1 riyal January 31 $.13 = 1 peso $.25 = 1 riyal February 15 $.14 = 1 peso $.26 = 1 riyal February 28 $.15 = 1 peso $.27 = 1 riyal Complete the summary income statement and balance sheet for the month ended January 31, 2011 and February 28, 2011, assuming there were no other transactions. INCOME STATEMENT Sales COGS Gross Margin Other Operating Expenses Exchange Gain / (Loss) Net Income January 31 February 28 BALANCE SHEET Cash Accounts Receivable Inventory Total Assets Accounts Payable Common Stock

3 Retained Earnings Total Liab and Equity January 31 February 28 INCOME STATEMENT Sales 105,600 30,000 COGS (77,000) (10,000) Gross Margin 28,600 20,000 Other Operating Expenses (10,000) (15,000) Exchange Gain / (Loss) (15,600) (1,200) Net Income 3,000 3,800 BALANCE SHEET Cash 2,490,000 2,483,800 Accounts Receivable 110, Inventory 33,000 23,000 Total Assets 2,633,000 2,506,800 Accounts Payable 130, Common Stock 2,500,000 2,500,000 Retained Earnings 3,000 6,800 Total Liab and Equity 2,633,000 2,506,800 Objective: LO5 3) Plymouth Corporation (a U.S. company) began operations on September 1, 2011, when the owner

4 borrowed $250,000 to establish the business. Plymouth then had the following import and export transactions with unaffiliated Chinese companies: September 6, 2011 Bought material inventory for 100,000 yuan on account. Invoice denominated in yuan. September 18, 2011 Sold 80% of inventory acquired on 9/6/11 for 110,000 yuan on account. Invoice denominated in yuan. October 5, 2011 Acquired and paid the 100,000 yuan owed to the Chinese supplier October 18, 2011 Collected the 110,000 yuan from the Chinese customer and immediately converted them into U.S. dollars The following exchange rates apply: Date Rate September 6 $ = 1 yuan September 18 $ = 1 yuan September 30 $ = 1 yuan October 5 $ = 1 yuan October 18 $ = 1 yuan 1. What were Sales in the September month-end income statement? 2. What was the COGS associated with these sales? 3. What is the Accounts Receivable balance in the balance sheet at September 30, 2011? 4. What is the Inventory balance in the balance sheet at September 30, 2011? 5. What is the Exchange gain or loss that will be reported for the month of September? 1. Sales = September 18 sale of 110,000 yuan at $.1607 / yuan = $17, COGS = 80% of inventory balance purchased 9/6/11 = 100,000 yuan $.1544 = $15,440 80% = $12, Accounts Receivable balance = 110,000 yuan $.1591 = $17, Inventory balance = 100,000 yuan $.1544 = $15,440 20% remaining after sale = $3, Exchange Gain / (Loss) in September = A/R = 110,000 yuan ($ $.1607) = ($176) Loss A/P = 100,000 yuan ($ $.1544) = ($470) Loss $176 Loss Loss = ($646) Net Loss in September Objective: LO5 4) Charin Corporation, a U.S. corporation, imports and exports small electronics. On December 1, 2011, Charin purchased components from an Egyptian manufacturer amounting to 500,000 Egyptian pounds. The purchase is payable in Egyptian pounds. At December 30, Charin wanted to take advantage of favorable exchange rates, but did not have the full amount required to pay off the entire amount. Charin wired the funds to pay off half of the balance owed, and expected to pay the remaining balance on January 3, Charin paid the remaining balance on January 3, The respective exchange rates were as follows: December 1, pound = $.170

5 December 30, pound = $.165 December 31, pound = $.175 January 3, pound = $.180 Document the journal entries related to these transactions for the four dates shown. If no entry is required, record "no entry." Charin's General Journal Date Account Name Debit Credit 12/1/11 Inventory 85,000 Accounts Payable (pound) 85,000 12/30/11 Cash (pound) 41,250 Cash 41,250 12/30/11 Accounts Payable (pound) 42,500 Exchange Gain 1,250 Cash (pound) 41,250 (250,000 pounds ($ $.170)) 12/31/11 Exchange Loss 1,250 Accounts Payable (pound) 1,250 (250,000 pounds ($ $.17)) 01/3/12 Cash (pound) 45,000 Cash 45,000 01/3/12 Accounts Payable (pound) 43,750 Exchange Loss 1,250 Cash (pound) 45,000 (250,000 pounds $0.180) Objective: LO5 5) Meric Corporation (a U.S. company) began operations on January 1, 2011, when the owner borrowed $150,000 to start the company. In the first month of operations, Meric had the following transactions: January 3, 2011 Bought inventory for 100,000 Brazilian real on account. Must be paid with Brazilian real. January 8, 2011 Sold 60% of inventory acquired on 1/3/11 for 32,000 British pounds on account. Invoice denominated in British pounds. January 10, 2011 January 23, 2011 Paid $3,000 in other operating expenses Acquired and paid half of the Brazilian real owed to the Brazilian supplier January 28, 2011 Collected half of the 32,000 pounds from the customer in Great Britain and immediately converted them into U.S. dollars

6 The following exchange rates apply: Date Rate Rate January 3 $.6260 = 1 real $ = 1 pound January 8 $.6230 = 1 real $ = 1 pound January 10 $.6210 = 1 real $ = 1 pound January 23 $.6250 = 1 real $ = 1 pound January 28 $.6330 = 1 real $ = 1 pound January 31 $.6180 = 1 real $ = 1 pound Complete the summary income statement and balance sheet for the month ended January 31, 2011 assuming there were no other transactions. INCOME STATEMENT Sales COGS Gross Margin Other Operating Expenses Exchange Gain / (Loss) Net Income January 31 BALANCE SHEET Cash Accounts Receivable Inventory Total Assets Accounts Payable Debt Retained Earnings Total Liab and Equity January 31 INCOME STATEMENT Sales 50,432 COGS (37,560) Gross Margin 12,872 Other Operating Expenses (3,000) Exchange Gain / (Loss) 82 Net Income 9,954 BALANCE SHEET Cash 140,662 Accounts Receivable 25,152 Inventory 25,040 Total Assets 190,854 Accounts Payable 30,900

7 Debt 150,000 Retained Earnings 9,954 Total Liab and Equity 190,854 Objective: LO5 6) On June 1, 2011, Puzzle Industries purchases an option contract for $5,000 on 10,000 gallons of aviation gas to minimize its purchasing cost price exposure. At the time, the market price is $2.50 per gallon and the option price of $2 per gallon will expire 6 months later. Puzzle can exercise the option at its discretion. When Puzzle prepares quarterly reports on June 30, Puzzle is still holding the option. On June 30, the market price of aviation gas is $4.50 per gallon. The option is to be settled net. On August 1, Puzzle exercises the option when the gas market price is $5.00 per gallon and purchases 40,000 gallons of gas. On August 15, Puzzle uses all of the gas on a charter flight. What are Puzzle's journal entries with regard to the aviation gas option? Assume this is a cash flow hedge. Ignore the time value of money. Puzzle's General Journal 6/01/11Aviation gas contract option 5,000 Cash 5,000 6/30/11Aviation gas contract option 20,000 Other comprehensive income 20,000 (($4.50-$2.00) 10,000 gallons = fair value debit balance of $25,000; unadjusted debit balance = $5,000 from June 1 entry.) 8/01/11Cash 30,000 Aviation gas contract option 25,000 Other comprehensive income 5,000 (Net settlement = ($5 - $2) 10,000 gallons = $30,000 received) Aviation gas inventory 200,000 Cash 200,000 (40,000 gallons $5 per gallon) 8/15/11Cost of goods sold 200,000 Aviation gas inventory 200,000 Other comprehensive income 25,000 Cost of goods sold 25,000 Objective: LO3 7) On November 1, 2011, Moddel Company (a U.S. corporation) entered into a 90-day forward contract to purchase 200,000 British pounds. The purpose of the forward contract is to hedge a commitment to

8 purchase special equipment on January 30, 2012 from a British firm Jeckyl Inc. The invoice price on the purchase commitment is denominated in British pounds. The forward contract is not settled net. Assume Moddel uses a 12% interest rate. Use a fair value hedge. The relevant exchange rates are stated in dollars per pound: Forward Rate Spot Rate to Jan. 30, 2012 November 1, 2011 $1.32 $1.35 December 31, 2011 $1.47 $1.50 January 30, 2012 $ What journal entry did Moddel record on November 1, 2011? 2.What journal entries did Moddel record on December 31, 2011? 3.What journal entries did Moddel record on January 30, 2012 if the purchase was made? 11/01/11 Contract receivable (pounds) 270,000 Contract payable 270,000 (200,000 $1.35) 12/31/11 Contract receivable (pounds) 30,000 Exchange gain 30, ,000 ($ $1.35) Exchange loss 30,000 Change in value of firm commitment in pounds 30, ,000 ($ $1.35) 01/30/12 Exchange loss 10,000 Change in value of firm commitment in pounds 10, ,000 ($ $1.50) Contract receivable (pounds) 10,000 Exchange gain 10, ,000 ($ $1.50) Contract payable 270,000 Cash 270,000 Cash (pounds) 200,000 $ ,000 Contract receivable (pounds) 310,000 Equipment 270,000 Change in value of firm commitment 40,000 in pounds Accounts payable (pounds) 310,000 Accounts payable (pounds) 310,000 Cash (pounds) 310,000

9 Objective: LO3 8) Texas, Incorporated (a U.S. corporation) sold inventory to a company in the Philippines for 1,600,000 pesos on account on February 1, 2011, with payment expected in 90 days. Texas entered into a forward contract to hedge this transaction, and properly accounts for the transaction as a cash flow hedge. Texas has a March 31 fiscal year end, and uses an 8% discount rate, resulting in a 30-day present value factor of The forward contract is settled net. The relevant exchange rates are shown below: Spot Rate Forward Rate to May 2, 2011 February 1, 2011 $ = 1 peso $ = 1 peso March 31, 2011 $ = 1 peso $ = 1 peso May 2, 2011 $ = 1 peso $ = 1 peso Record the journal entries needed by Texas on February 1, March 31, and May 2. Round all entries to the nearest whole dollar. 2/1/11 Accounts receivable (peso) 36,640 Sales 36,640 (1,600, ) 3/31/11 Accounts receivable (peso) 4,000 Exchange gain 4,000 (1,600,000 ( )) Forward contract 318 Other comprehensive income 318 Current forward rate: 1,600,000 pesos $ $42,880 Contracted forward rate: 1,600,000 pesos $ ,200 Net change in value 320 PV for 30 6%.9934 Fair value of forward contract on 3/31/11 $ 318 Exchange loss 4,000 Other comprehensive income 4,000 Other comprehensive income 4,252 Exchange gain 4,252 Discount rate = % per month $2,068 + $2,184= $4,252 $2,068 = $36,640

10 $2,184 = [ ($36,640 + $2,068)] 05/02/11 Accounts receivable (peso) 4,160 Exchange gain 4,160 (1,600,000 ( )) Exchange loss 4,160 Other comprehensive income 4,160 Other comprehensive income 2,308 Exchange gain 2,308 ($36,640 + $4,252) = 2,308 Other comprehensive income 1,918 Forward contract 1,918 Current forward rate: 1,600,000 pesos $ $ 44,800 Contracted forward rate: 1,600,000 pesos $ ,200 Net change in value 1,600 Add amount previously recorded 318 1,918 Cash (peso) 44,800 Accounts receivable (peso) 44,800 (1,600, ) Forward contract 1,600 Cash 1,600 Objective: LO4 9) On December 15, 2011, Electronix Company purchased inventory from a foreign supplier for 2,000,000 foreign currency units (fcu's). Payment will be made on February 13, On December 15, 2011, to hedge the transaction, Electronix signed a forward contract to buy 2,000,000 fcu's in 60 days. Electronix uses a discount rate of 5% resulting in a 45-day present value factor of The forward contract will be settled net. The related exchange rates are shown below: Spot Rate Forward Rate to 2/13/12 December 15, 2011 $0.010 = 1 fcu $0.010 = 1 fcu December 31, 2011 $0.012 = 1 fcu $0.011 = 1 fcu February 13, 2012 $0.013 = 1 fcu $0.013 = 1 fcu On December 15, 2011, Electronix recorded a debit to Inventory and a credit to Accounts Payable (fcu) for $20,000, using the current spot rate.

11 1. Show the required entries on December 31, 2011 if the hedge is a cash flow hedge. Round to the nearest whole dollar. 2. Show the required entries on December 31, 2011 if the hedge is a fair value hedge. Round to the nearest whole dollar. 1. Year-end entries Cash flow hedge: Exchange loss 4,000 Accounts payable (fcu) 4,000 (2,000,000 ( )) Forward contract 1,988 Other comprehensive income 1,988 Current forward rate: 2,000,000 fcu $.011 $ 22,000 Contracted forward rate: 2,000,000 fcu $.01 20,000 Net change in value 2,000 PV for 45 5%.9938 Fair value of forward contract on 12/31/11 $ 1,988 Other comprehensive income 4,000 Exchange gain 4, Year-end entries - Fair value hedge: Exchange loss 4,000 Accounts payable (fcu) 4,000 Forward contract 1,988 Gain on forward contract 1,988 Objective: LO3 10) On January 1, 2011, Bosna borrowed $100,000 from Lenda. The three-year term note carries a variable rate interest, based on LIBOR, and interest is payable at December 31 of each year, compounded annually. The first year's rate of interest is 7% and Bosna would like to assure that their rate does not increase. Bosna enters into a pay-fixed, receive-variable interest rate swap agreement with Swamp City Bank, under which Bosna will pay 7%, fixed. At December 31, 2011, it is determined that Bosna's interest rate to Lenda for 2012 will be 6%. At December 31, 2012, the interest rate for 2013 was determined to be 8%. Treat as a cash flow hedge. Determine the estimated fair value of the hedge at December 31, 2011, and prepare the related journal entries required to document this hedge and the related interest payments at December 31, 2011, 2012, and 2013, including final repayment on 12/31/13. Assume a flat interest rate curve. 12/31/11: Fair value of swap = PV of estimated future net payments: Estimated payment based on Present Date of payment 12/31/11 rate Factor Value

12 12/31/12.01 $100,000 1/(1.06) $943 12/31/13.01 $100,000 1/(1.06)2 890 Total $1,833 12/31/11 Other comprehensive income 1,833 Interest rate swap 1,833 Interest Expense 7,000 Cash 7,000 12/31/12: Fair value of swap = PV of estimated future net payments: Estimated payment based on Present Date of payment 12/31/11 rate Factor Value 12/31/13.01 $100,000 1/(1.08) $ /31/12 Interest Expense 6,000 Cash 6,000 Interest Expense 1,000 Cash 1,000 Interest rate swap 2,759 Other Comprehensive Income 2,759 12/31/13 Interest Expense 8,000 Cash 8,000 Cash 1,000 Interest Expense 1,000 Other Comprehensive Income 926 Interest rate swap 926 Loan Payable 100,000 Cash 100,000 Objective: LO3 11) Opie Industries is a manufacturer of plastic bottles. On September 1, 2011, Opie purchased an option contract at a cost of $2,000. The purpose of the option is to hedge against increases in the price of this type of plastic, "PET." The option is to buy 1,000,000 pounds of PET on March 1, 2012 for $.75 per pound. If the market price of PET is below $.75 on March 1, Opie will let the option expire. If the market price is above $.75, then Opie will exercise the option. The option is to be settled net. Opie assumes a 6% annual borrowing rate. Assume this is a cash flow hedge. Prepare the entry that Opie should record on September 1, Then, assuming that the price of PET is $.72 on December 31, 2011 (Opie's year end), prepare the entry that Opie should record. Finally, prepare the entries for March 1, 2012, assuming that the price of PET is $.78.

13 9/1/11 PET Contract Option 2,000 Cash 2,000 12/31/11 Other comprehensive income 2,000 PET Contract Option 2,000 (The option has no value because the market price is below the exercise price.) 3/1/12 PET Contract Option 30,000 Other comprehensive income 30,000 [1,000,000 ($ $0.75)]=30,000 3/1/12 PET Inventory 780,000 Cash 780,000 Cash 30,000 PET Contract Option 30,000 Objective: LO2 12) Bronn Company purchased all the outstanding stock of Leather Company (a manufacturing company in Argentina) when the book value of Leather's net assets equaled their fair value. Leather's summarized balance sheet is shown below on January 1, 2011, the date of acquisition, and on December 31, 2011, when the exchange rates were $.25 and $.20, respectively. The average exchange rate for 2011 was $.23, and Leather paid dividends in 2011 amounting to 300,000 pesos when the exchange rate was $.21. January 1, 2011 (Peso) December 31, 2011 (Peso) BALANCE SHEET Cash 1,400,000 1,100,000 Accounts Receivable 400,000 1,400,000 Inventory 1,200,000 1,200,000 Building & Equipment 1,000,000 1,000,000 Accumulated Depreciation (200,000) (300,000) Total Assets 3,800,000 4,400,000 Accounts Payable 300, ,000

14 Debt Payable 1,000,000 1,000,000 Common Stock 2,000,000 2,000,000 Retained Earnings 500,000 1,040,000 Total Liab. & Equity 3,800,000 4,400,000 If Leather's functional currency and reporting currency are the Argentine peso, compute the change to other comprehensive income that would result from the translation of these financial statements at December 31, Book value of beginning net assets = 2,500,000 pesos change in exchange rates ($.25 to $.20) = (0.05) $(125,000) Net income (change in R/E + dividends paid) = 840,000 change in exchange rates ($.23 to $.20) = (0.03) ( 25,200) Less Dividends = (300,000) change in exchange rates ($.21 to $.20) = (0.01) 3,000 Other comprehensive income Translation loss $(147,200) Objective: LO6

Cash and cash equivalents 619,525 Trade accounts receivable and others 951,653 Total 1,571,178 Net $ 229,209

Cash and cash equivalents 619,525 Trade accounts receivable and others 951,653 Total 1,571,178 Net $ 229,209 11. Derivative financial instruments The Entity has exposure to market risks, operating risks and financial risks arising from the use of financial instruments that involves interest rates, credit risks,