Solutions to GAAP: Graded Questions Hedge accounting
Solution 22.2
Part A: no FEC
YEN (¥)
Calculations Debit/ (Credit)
1 October 20X4: transaction date
Plant: cost RUB360 000 x 1,75 SR on TD 630 000
Foreign creditor (630 000)
Acquisition of plant
31 December 20X4: reporting
date
Foreign exchange loss (P/L) RUB360 000 x 1,85 SR on RD - 36 000
Foreign creditor RUB360 000 x 1,75 Prior SR (36 000)
Restatement of creditor at year end
Depreciation (P/L) (¥630 000 – 0)/ 10 x 1/12 5 250
Plant: accumulated depreciation (5 250)
(A)
Depreciation of plant
1 March 20X5: settlement date
Foreign exchange loss (P/L) RUB360 000 x 1,90 SR on SD – 18 000
Foreign creditor RUB360 000 x 1,85 Prior SR (18 000)
Restatement of creditor on settlement date
Foreign creditor RUB360 000 x 1,90 SR on SD 684 000
Bank (684 000)
Settlement of the creditor
31 December 20X5: year-end
Depreciation (P/L) (¥630 000 – 0) / 10 x 1 63 000
Plant: accumulated depreciation (63 000)
(A)
Depreciation of plant
Spot: 1,75 1,85 1,90
TD RD: Y/E Settle
1 Oct 31 Dec 1 Mar
Key:
FC: firm commitment, or if you see FC on the timeline, it refers to the date on which FC was
entered into
FEC: forward exchange contract, or if you see FEC on the timeline, it refers to the date on
which FEC was entered into
SR: spot rate
TD: transaction date
RD: reporting date (e.g. YE = year-end)
SD: settlement date
© Service & Kolitz, 2022-2023 Chapter 22: Page 3
Solutions to GAAP: Graded Questions Hedge accounting
Solution 22.2 continued …
Part B: with an FEC YEN (¥)
Debit/ Credit)
1 October 20X4: transaction date
Plant: cost RUB360 000 x 1,75 SR on TD 630 000
Foreign creditor (630 000)
Acquisition of plant
31 December 20X4: year-end
Foreign exchange loss (P/L) RUB360 000 x 1,85 SR on RD - 16 000
Foreign creditor RUB360 000 x 1,75Prior SR (16 000)
Restatement of the foreign creditor at year end
FEC asset RUB360 000 x 2,10 FR on RD – 108 000
Foreign exchange gain (P/L) RUB360 000 x 1,80 FR obtained (108 000)
Foreign exchange gain on the fair value hedge
Depreciation (P/L) (¥630 000 – 0)/ 10 x 1/12 5 250
Plant: accumulated depreciation (A) (5 250)
Depreciation of plant
1 March 20X5: settlement date
Foreign exchange loss (P/L) RUB360 000 x 1,90 SR on SD – 18 000
Foreign creditor RUB360 000 x 1,85 Prior SR (18 000)
Restatement of the creditor at settlement date
Foreign exchange loss: FEC (P/L) RUB360 000 x 1,90 SR on SD – 72 000
FEC asset RUB360 000 x 2,10 Prior FR (72 000)
Forex loss on the fair value hedge
Foreign creditor RUB360 000 x 1,90 SR on SD 684 000
Bank (684 000)
Bank Balance in the FEC Asset a/c: 108 000 – 72 000 36 000
FEC asset Or: RUB360 000 x 1,90 SR on expiry – (36 000)
RUB360 000 x 1,80 FR obtained
Settlement of the foreign creditor and receipt from financing house on expiry of FEC
31 December 20X5: year-end
Depreciation (P/L) (¥630 000 – 0) / 10 x 1 63 000
Plant: accumulated depreciation (A) (63 000)
Depreciation of plant
Spot: 1,75 1,85 1,90
FEC
TD RD: YE Settle
1 Oct 31 Dec 1 Mar
FEC: 1,80 2,10 N/A
Comment: This question shows us how to account for the importation of an item of PPE
(A) without an FEC; and then
(B) with an FEC.
Note how Part B simply includes additional journals for the FEC. Take a careful look and see how the
FEC hedges against the movements in the spot exchange rates (i.e. a forex loss was caused by the
movement in the spot rates that caused the creditor balance to increase by ¥54 000 but the FEC partially
offset this with the gain of ¥36 000). The net effect is that the Japanese company paid ¥648 000 (¥684 000
to the creditor but receiving ¥36 000 from the financing house) and thus it 'locked in' at the forward rate
of ¥1,80: RUB1 (¥1,80 x RUB360 000).
© Service & Kolitz, 2022-2023 Chapter 22: Page 4
