Question

Maple Company had the following export and import transactions during 20X5:

On March 1, Maple sold goods to a Canadian company for C$38,000, receivable on May 30. The spot rates for Canadian dollars were C$1 = $0.65 on March 1 and C$1 = $0.68 on May 30.
On July 1, Maple signed a contract to purchase equipment from a Japanese company for ¥490,000. The equipment was manufactured in Japan during August and was delivered to Maple on August 30 with payment due in 60 days on October 29. The spot rates for yen were ¥1 = $0.102 on July 1, ¥1 = $0.104 on August 30, and ¥1 = $0.106 on October 29. The 60-day forward exchange rate on August 30, 20X5, was ¥1 = $0.1055.
On November 16, Maple purchased inventory from a London company for £18,000, payable on January 15, 20X6. The spot rates for pounds 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 Assume that Maple used forward contracts to manage the foreign currency risks of all of its export and import transactions during 20X5.
On March 1, 20X5, Maple, anticipating a weaker Canadian dollar on the May 30, 20X5, settlement date, entered into a 90-day forward contract to sell C$38,000 at a forward exchange rate of C$1 = $0.64. The forward contract was not designated as a hedge.
On July 1, 20X5, Maple, anticipating a strengthening of the yen on the October 29, 20X5, settlement date, entered into a 120-day forward contract to purchase 490,000 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, Maple, anticipating a strengthening of the pound on the January 15, 20X6, settlement date, entered into a 60-day undesignated forward exchange contract to purchase £18,000 at a forward exchange rate of £1 = $1.67.
Prepare journal entries to record Maple’s foreign currency activities during 20X5 and 20X6.
1.) Record the entry for the 90-day forward contract signed for the forecasted foreign currency transaction.
2.) Record the revaluation of the foreign currency.
3.) Record the payment to the exchange broker in accordance with the forward contract.
4.) Record the receipt of cash from the exchange broker.

Answer 1

Maple Company's journal entries for foreign currency transactions involve forward contracts to manage currency risks with the Canadian dollar, Japanese yen, and British pounds. Recording involves entries for signing forward contracts, revaluation due to exchange rate fluctuations, and payments on settlement dates.

Step-by-step explanation:

The question involves recording journal entries for Maple Company's foreign currency transactions using forward contracts for the year 20X5 and beginning 20X6. The company engaged in transactions involving Canadian dollars, Japanese yen, and British pounds, using forward contracts to manage foreign currency risks associated with these transactions.

For the Canadian dollar transaction: Maple Company would record the entry of the 90-day forward contract on March 1, 20X5, when it was signed. The entry is not provided as it is considered a forecasted transaction, and forecasted transactions are not recorded in the financial statements. However, changes in the fair value of this contract would be recognized in the earnings. On settlement, Maple Company would record the receipt of Canadian dollars and the payment to the exchange broker.

For the Japanese yen transaction: Maple Company recognized this as a fair value hedge, so it would record the entry of the 120-day forward contract on July 1, 20X5. Revaluation entries would be made to adjust the value of both the forward contract and the firm commitment. On the settlement date, Maple Company would record the payment for the equipment based on the forward rate specified in the contract.

For the British pound transaction: As with the Canadian transaction, Maple Company entered an undesignated forward contract. It would make journal entries to revalue the contract due to exchange rate changes at year-end and record the payment on the settlement date based on the contracted rate.