Foreign Currency Transactions

Busi 4422  Assignment 1  Foreign Currency Transactions

Question 1

Cameron Enterprises conducted two foreign-currency transactions on September 1, Year 2.

In the first transaction, it sold E750,000(E represents Euro) in merchandise to a foreign company.  Cameron agreed to a note receivable for collection of the receivable. The note receivable was due on September 1, Year 6.  The foreign company is well established and there is no risk of default. The note has an interest rate of 10 percent per year, payable at December 31, each year. Both the interest and the note will be paid in Euros.  This receivable is not hedged in any way.

In the second transaction, Cameron purchased SF  1,200,000 worth of inventory from a country in another foreign country.  This amount is payable on November 1, Year 3.  There is no interest on this liability and it is not hedged.

Exchange Rates
September 1, Year 2	Spot Rate	$1 = E 2.5	$1 = SF3.9
December 31, Year 2	Spot Rate	$1 = E 2.8	$1 = SF3.4
Year 2	Average Rate	$1 = E2.3	$1 = SF4.1
Sept. – Dec, Year 2	Average Rate	$1 = E 2.6	$1 = SF3.6
November 1, Year 3	Spot Rate		$1 = SF3.1
December 31, Year 3	Spot Rate	$1 = E 3.6
Year 3	Average Rate	$1 = E3.0

Required:

Prepare all the journal entries for Years 2 and 3 for the two transactions.  Assume a December 31 year end.

Question 2

Marconi Products sells its products to countries around the world.  On December 1, Year 3,  Marconi sold products to a company in a foreign country at a total cost of 650,000 foreign currency units (FCs) when the spot rate was FC1 = $0.589.  The terms of the sale required payment by April 1, Year 4. On December 3, Year 3, Marconi entered into a forward contract with the Bank of Nova Scotia at the 120-day forward rate of FC1 - $0.629.  Hedge accounting is not applied.

The fiscal year-end of Marconi is December 31, and on this date the spot rate was FC1 = $0.602 and the forward rate was FC1 = $0.639. The payment from the foreign customer was received on April 1, Year 4, when the spot rate was FC1 = $0.647.

Required:

1.      Prepare the journal entries to record

a.      The sale and forward contract.

b.      Any adjustments required on December 31.

c.       The cash received in Year 4.

2.      Prepare the partial Balance Sheet of Marconi on December 31, Year 3, that shows the presentation of the receivable and the accounts associated with the forward contract.

Question 3

Assume  research  and development costs are capitalized as an Intangible asset on the balance sheet. 

Find research and development costs in the CICA Handbook and determine what is required in regards to amortizing these costs?  You are toalso  indicate the section number and paragraph that you used to answer this question.

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