Chapter 12 Test Bank

FOREIGN CURRENCY CONCEPTS AND TRANSACTIONS

Multiple Choice Questions

LO1
1.

On May 1, 20X3, Emu Corporation purchased merchandise from a

Danish firm for 198,000 Danish krone when the spot rate for
krone was 5.200 krone per dollar. The account payable was
denominated in krone. Emu settled the account on September 1
when the spot rate for krone was 5.345 krone per dollar. How
much cash will Emu have to disburse to settle the account?
a.
b.
c.
d.

LO1
2.

$
37,043.97.
$
38,076.93.
$1,029,600.00.
$1,058,310.00.

Cassowary Corporations balance sheet at December 31, 20X3

included a $20,400 account receivable from Quail Corporation of
Australia. The account receivable was denominated as 30,000
Australian dollars (A$). What entry did Cassowary make on
January 16, 20X3 when the account receivable was collected and
the exchange rate for A$ was $.67?
a. Cash

20,100

b. Cash
Exchange Loss
Accounts Receivable

20,100
300

c. Cash

20,400

d. Cash

20,700

Accounts Receivable

Accounts Receivable

20,100
20,400

Accounts Receivable
Exchange Gain

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20,400
20,400
300

LO2
3.

The exchange rates between the Australian dollar and the US

dollar were as follows:
Jun
Jul
Aug
Sep

1
1
1
1

1$AUS
1$AUS
1$AUS
1$AUS

=
=
=
=

$.71US
$.73US
$.79US
$.83US

This chart shows a

a. strengthening Australian Dollar which makes it less
expensive for Americans to buy Australian goods.
b. weakening Australian dollar which makes it less expensive
for Americans to buy Australian goods.
c. strengthening Australian dollar which makes it more
expensive for Americans to buy Australian goods.
d. weakening Australian dollar which makes it more expensive
for Americans to buy Australian goods.

LO2
4.

Which of the following factors will affect the spread between

spot and forward rates?
a.
b.
c.
d.

LO2
5.

The
The
The
All

current cross rate between two currencies.

length of time for the forward contract.
currency denominated as the domestic currency.
of the above will affect the spread.

A US importer that purchased merchandise from a South Korean

firm would be exposed to a net exchange gain on the unpaid
balance if the
a. dollar weakened relative to the Korean won and the won was
the denominated currency.
b. dollar weakened relative to the Korean won and the dollar
was the denominated currency.
c. dollar strengthened relative to the Korean won and the won
was the denominated currency.
d. dollar strengthened relative to the Korean won and the
dollar was the denominated currency.

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Use the following information for Questions 6 and 7.

On November 1, 20X3, Magpie Corporation sold merchandise to William
Tell Corporation, a Swiss firm. Magpie measured and recorded the
account receivable from the sale at $78,000. William Tell paid for
this account on November 30, 20X3. Spot rates for Swiss francs on
November 1 and November 30, respectively, were $0.80 and $0.78.
LO3
6.

If the sale of the merchandise was denominated in francs, the

November 30 entry to record the receipt of payment from William
Tell included a
a.
b.
c.
d.

LO3
7.

If the sale of merchandise is denominated in dollars, the

November 30 entry to record receipt of the payment from William
Tell included a
a.
b.
c.
d.

LO3
8.

credit to Accounts Receivable for $76,050.

credit to Exchange Gain for $1,950.
debit to Cash for $78,000.
debit to Exchange Loss for $1,950.

debit to Cash for $78,000.

debit to Cash for $76,050.
credit to Exchange Gain for $1,950.
credit to Accounts Receivable for $76,050.

On December 5, 20X3, Goose Corporation, a US firm, bought

inventory items from Grebes Corporation of Norway for 1,000,000
Norwegian krone when the spot rate for krone was $0.168. At
Gooses December 31, year-end, the spot rate was $0.167. On
January 4, 20X4, Goose purchased 1,000,000 krone for $167,500
and paid the invoice. How much gain or (loss) did Goose report
in its 20X3 and 20X4, respectively, income statements?
a.
b.
c.
d.

$(1,000) and $500.

$0 and ($500).
$0 and $500.
$1,000 and ($500).

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Use the following information for Questions 9 and 10.

On October 2, 20X4, Duck Corporation borrowed 150,000 British pounds
from a London bank, evidenced by an interest-bearing note payable due
in one year. The note was payable in pounds. Exchange rates for
pounds was:
October 2, 20X4
December 31, 20X4
October 2, 20X5
LO3
9.

What exchange
statement?
a.
b.
c.
d.

LO3
10.

a
a
a
a

loss
loss
gain
gain

of
of
of
of

gain

or

$1.60
$1.62
$1.56

loss

appeared

on

Ducks

20X4

income

$6,000.
$3,000.
$3,000.
$6,000.

What is the final amount of the loan payable that Duck showed
on its books, in dollars, just before it repaid the loan?
a.
b.
c.
d.

$234,000.
$236,000.
$240,000.
$243,000.

Use the following information for questions 11 and 12.

On November 2, 20X5, Swan Corporation entered into a 90-day contract
to sell 220,000 kiwis in a transaction accounted for as speculation.
The spot rate for kiwis on November 2 was $0.74 and the current
quotation for 90-day futures was $0.68. On December 31, 20X3, the
spot rate was $0.78 and the quotation for 30-day futures was $0.35.

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LO4
11.

Swans entry on November 2, 20X5 included a

a. debit to Contract Receivable denominated in
$149,600.
b. credit to Contracts Payable denominated in
$149,600.
c. debit to Contract Receivable denominated in
$154,000.
d. credit to Contracts Payable denominated in
$154,000.

LO4
12.

for

kiwis

for

kiwis

for

kiwis

for

What amount of exchange gain or (loss) was included in Swans

20X5 income?
a.
b.
c.
d.

LO4
13.

kiwis

$(8,800).
$(4,400).
$ 4,400.
$ 8,800.

Under which of the following situations must a discount on a

forward contract be amortized to income over the life of the
contract?
a. If the contract is a hedge of a net asset position.
b. If the contract is a speculation in currency.
c. If the contract is a hedge of a foreign currency
commitment.
d. Under none of the above would a discount on a forward
contract be amortized to income over the life of the
contract.

LO4
14.

A forward exchange contract is transacted at a discount if the

current forward rate is
a.
b.
c.
d.

less
more
less
more

than
than
than
than

the
the
the
the

current spot rate.

current spot rate.
expected spot rate.
expected spot rate.

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LO5
15.

Which of the following is not a characteristic of a derivative?

a. It has one or more underlyings and one or more notational
amounts.
b. It requires no initial net investment or an initial
investment that is smaller than would be required for
contracts expected to have a similar response to the
market.
c. It requires no net settlement.
d. It will be represented as an asset or liability on the
financial statements.

LO5
16.

Derivatives are measured on the financial statements at?

a.
b.
c.
d.

LO6
17.

Historical cost.
Effective hedge price.
Strike price.
Fair value.

Which of the following hedging strategies would a business most

likely use?
a. An importer will want to hedge his foreign denominated
accounts receivable and will purchase forward contracts to
hedge an exposed net asset position.
b. An importer will want to hedge his foreign denominated
accounts payable and will purchase forward contracts to
hedge an exposed net liability position.
c. An exporter will want to hedge his foreign denominated
accounts receivable and will purchase forward contracts to
hedge an exposed net liability position.
d. An exporter will want to hedge his foreign denominated
accounts payable and will purchase forward contracts to
hedge an exposed net liability position.

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LO6
18.

Which of the following techniques can be used to measure hedge

effectiveness?
a.
b.
c.
d.

LO6
19.

Which of the following is not an approach appropriate for hedge

accounting?
a.
b.
c.
d.

LO7
20.

Critical term analysis.

Contribution margin analysis.
Present value analysis.
Breakeven analysis.

Fair value hedge.

Straddle hedge.
Cash flow hedge.
Hedge of net investment in a foreign subsidiary.

If a financial instrument is classified as a cash flow hedge,

then
a. its gains or losses are represented in the income statement
if a year-end occurs before the settlement date.
b. it is classified as a held-to-maturity asset.
c. it does not require a notational amount.
d. its gains or losses are represented in the balance sheet if
a year-end occurs before the settlement date.

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LO2
Exercise 1
On September 1, 20X5,
Osaka Company of Japan
The spot rate for yen
was $0.0077 on October

Cormorant Company purchased merchandise from

for 20,000,000 yen payable on October 1, 20X5.
was $0.0079 on September 1 and the spot rate
1.

Required:
1. Did the exchange rate strength or weaken from September to October
and what are the implications for Cormorants business?
2. What journal entry did Cormorant record on September 1, 20X5?
3. What journal entry did Cormorant record on October 1, 20X5?

LO3
Exercise 2
On October 15, 20X5, Ibis Corporation, a French company, ordered
merchandise listed on the Internet for 20,000 Euros from Spoonbill
Corporation, a US corporation, which immediately accepted the order.
The Euro rate was $1.20 US on October 15.
On November 15, 20X5
Spoonbill shipped the goods and billed Ibis the purchase price of
20,000 Euros when the Euro rate was $1.30 US. Ibis paid the bill on
December 10, 20X5. Three days later Spoonbill exchanged the 20,000
Euros for US dollars when the Euro rate was $1.28US.
Required:
Compute the foreign currency gains or losses on the December 31, 20X5
financial statements and show your calculations.
LO3
Exercise 3
On November 1, 20X3, the Penguin Corporation, a US corporation, purchased
an extruding machine from Shearwater Corporation, a UK company. The
purchase price was $10,000 and Penguin agreed to pay in pounds on February
1, 20X4. Both corporations are on a calendar year accounting period. Assume
that the spot rates for the British pound on November 1, 20X3, December 31,
20X3, and February 1, 20X4, are $1.60, $1.62, and $1.66, respectively.
Required:
Record the November 1, December 31, and February 1 transactions in the
General Journals of Penguin Corporation and Shearwater Corporation. If no
entry is required on a particular date, indicate No entry in the General
Journal.
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LO4
Exercise 4
On November 1, 20X3, Petrel Corporation, a calendar-year US
corporation, invested in a purely speculative contract to purchase 1
million yen on January 30, 20X4, from the Karoke Trading Company, a
Japanese brokerage firm. Petrel agreed to purchase 1,000,000 yen from
Karoke at a fixed price of $0.0100 per yen. Karoke agreed to transmit
1,000,000 yen to Petrel on February 1, 20X4. The spot rates for yen
are:
Nov 01, 20X3
Dec 31, 20X3
Jan 30, 20X4

1 yen = $0.0097
1 yen = $0.0103
1 yen = $0.0106

The 30-day forward rate for yen on December 31, 20X3 was $0.0104.
Required:
Prepare the General Journal entries that
November 1, December 31, and January 30.

Petrel

would

record

on

LO4
Exercise 5
On November 1, 20X5, Albatross Corporation, a calendar-year US
corporation, invested in a purely speculative contract to purchase 1
million euros on January 30, 20X6, from Munich Company, a German
brokerage firm. Albatross agreed to purchase 1,000,000 euros from
Munich at a fixed price of $1.020 per euro. Munich agreed to transmit
1,000,000 euros to Albatross on January 30, 20X6. The spot rates for
euros are:
Nov 01, 20X5
Dec 31, 20X5
Jan 30, 20X6

1 euro = $1.015
1 euro = $0.995
1 euro = $1.010

The 30-day futures rate for euros on December 31, 20X5 was $1.005.
Required:
Prepare the General Journal entries that Albatross would record on
November 1, December 31, and January 30.

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LO7
Exercise 6
0n June 1, 20X5, Stork 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. Stork can exercise the option at its discretion. When Stork
prepares quarter reports on June 30, the option is worth $4.50 and
Stork is still holding it.
On August 1, Stork exercises the option when the gas market price is
$5.00 per gallon and purchases 40,000 gallons of gas. On August 15,
Stork uses all of the gas on a charter flight.
Required:
What are Storks journal entries with regard to the aviation gas
option?

LO7
Exercise 7
On November 1, 20X5, US Pelican Company entered into a 90 day forward
contract of 200,000 pounds to hedge a commitment to purchase special
equipment on February 1, 20X6 from a British firm Raven Inc. Assume
Pelican uses a 12% interest rate.
The relevant exchange rates are of dollars per pound:
Spot Rate
Forward Rate
(for Feb 1, 20X6)
November 1, 20X5
1.32
1.35
December 31, 20X5
1.47
1.50
February 1, 20X6
1.55
-

Required:
1.What journal entry did Pelican record on November 1, 20X5?
2.What journal entry did Pelican record on December 1, 20X5?
3.What journal entry did Pelican record on February 1, 20X6 if the
purchase was made?

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LO8
Exercise 8
On November 1, 20X3, Darter Corporation, a US corporation, purchased
from Jacana Corporation, a Mexican company, some machinery that cost
1,000,000 pesos. The invoice was payable in pesos on January 30,
20X4. To hedge against rapid changes in the peso, Darter entered into
a forward exchange contract on November 1, 20X3 with AB Trader &
Company, a US brokerage and investment firm. The contract specified
that AB Trader would sell 1,000,000 pesos to Darter at $0.102 per
peso for settlement on January 30, 20X4.
Assume that all three companies
standards and have December 31st
on November 1, December 31, and
$0.107, respectively. The 30-day
31, 20X3 is $0.101.

are subject to the same accounting

year-ends. The spot rates for pesos
January 30, are $0.100, $0.098, and
forward rate for pesos on December

Required:
Record General Journal entries for Darter Corporation on November 1,
December 31, and January 30. If no entry is required on a particular
date, indicate No entry in the General Journal.
LO8
Exercise 9
On November 1, 20X3, Gannet Corporation purchased 5,000 television
sets for its merchandise inventory from Seoul, a South Korean firm,
at a total quoted cost of 600,000,000 won (W). On this date, the spot
rate for won was $1 = 750W. On the same day, Gannet invested $900,000
cash in a non-interest bearing account with Tokyo, a Japanese bank,
to hedge its exposed liability position. The account payable to Seoul
is due on January 30, 20X4. The exchange rates on December 31, 20X3
and January 30, 20X4 were $1 = 730W, and $1 = 700W, respectively.
Gannet agreed to pay Seoul in won. Tokyo held the deposit in won but
will remit dollars back to Gannet on January 30th.
Assume that Gannet, Seoul and Tokyo are subject
accounting standards and have December 31 year-ends.

to

the

same

Required:
Prepare all the journal entries for Gannet Corporation's General
Journal on November 1, 20X3, December 31, 20X3, and January 30, 20X4.
If no entry is required on a particular date, indicate No entry in
the General Journal.

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LO8
Exercise 10
On November 1, 20X5, US Frigatebird Company sold an airplane worth $1
million Australian dollars to Australian company Heron Inc. to be
delivered on February 1, 20X6 in Sydney.
In order hedge foreign
exchange, Frigatebird entered into a 90 day forward contract on the
same day for the amount of the sale at .73 US per Australian dollar.
The relevant exchange rates are of US dollars per Australian dollar:
Spot Rate
November 1, 20X5
.73
December 31, 20X5
.75
February 1, 20X6
.79

Required:
1.What journal entry did Frigatebird record on November 1, 20X5?
2.What journal entry did Frigatebird record on December 1, 20X5?
3.What journal entry did Frigatebird record on February 1, 20X6 if
the purchase was made?

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SOLUTIONS
Multiple Choice Questions
1.

(198,000 krone/5.345 krone per dollar) = $37,043.97

2.

30,000 x .67 = 20,100; $20,100 - $20,400 = $300 loss

3.

4.

5.

6.

$78,000/.80 dollars per franc =

$78,000/.78 dollars per franc =
Difference in francs =
Difference in dollars (2,500) x .78 =

97,500
100,000
(2,500)
$

7.

$97,500 francs (from 6 above) x .78 = $76,050

8.

Account payable, Dec 05, 20X3

1,000,000 x $0.168 =
Account payable, Dec 31, 20X3
1,000,000 x $0.167 =
Gain
Account payable, Dec 31, 20X3
Account payable, at settlement
Realized loss

(1,950)

168,000

167,000
1,000

$
$

9.

150,000 pounds x (1.60 1.62) = $(3,000) loss

10.

150,000 pounds x 1.62 = $243,000

11.

(220,000 kiwis)x($0.68) = $149,600

12.

(220,000 kiwis)x($.68 - $.70) = $4,400 loss

167,000
167,500
500

(To adjust the contract to the 30 day futures amount)

13.

14.

15.

c
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16.

17.

18.

19.

20.

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Exercise 1
Requirement 1
The foreign exchange rate weakened making the purchase of goods on
time cheaper from Japan.
Requirement 2 and 3
Date
9/01/X5

Account Name
Merchandise
Accounts Payable: Osaka

Debit
158,000

10/01/X5

Accounts Payable: Osaka

FX gain
Cash

158,000

Credit
158,000
4,000
154,000

Exercise 2
A $1,042 foreign exchange loss
Spoonbills General Journal
Date
10/15/X5

Account Name
Accounts receivable
Sale 20,000/1.2

12/10/X5

No entry

12/13/X5

Cash 20,000/1.28
Foreign exchange loss
Accounts receivable

Debit
16,667

Credit
16,667

15,625
1,042
16,667

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Exercise 3
Date
Nov 01
Dec 31
Feb 01

Direct Method
1 = $1.60
1 = $1.62
1 = $1.66

Indirect Method
$1 = .6250
$1 = .6173
$1 = .6024

Penguins General Journal

Date
11/01/X1

Account Name
Machinery
Accounts Payable: Shearwater

Debit
10,000

12/31/X1

Exchange Loss
Accounts Payable: Shearwater

125

Credit
10,000
125

(6,250 x $1.62 = $10,125)

($10,000 - $10,125 = $125 loss)
02/01/X2

Exchange Loss
Accounts Payable: Shearwater
Accounts Payable: Shearwater
Cash

250
250
10,375

10,375

(6,250 x $1.66 = $10,375)

Shearwaters General Journal
11/01/X1

Accounts Receivable: Penguin

Sales Revenue

12/31/X1

No entry

02/01/X2

Cash

Accounts Receivable: Penguin

6,250
6,250

6,250

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6,250

Exercise 4
Petrels General Journal
11/01/X1

Contract Receivable
Contract Payable
(1,000,000 x $0.0100)

12/31/X1

Contract Receivable
Exchange Gain
{1,000,000 x ($.0104 0.0100)}

400

01/30/X2

Contract Receivable
Exchange Gain
{1,000,000 x ($.0106 - .0104)}

200

Cash
Contracts Payable
Cash
Contract Payable

10,000

10,000

400

200

10,600
10,000
10,000
10,600

Exercise 5
Albatrosss General Journal
11/01/X3

12/31/X3

01/30/X4

Contract Receivable
Contract Payable
(1,000,000 x $1.020/euro)

1,020,000
1,020,000

Exchange Loss
Contract Receivable
{1,000,000 x ($1.010 $1.020)}

10,000

Contract Receivable
Exchange Gain
{1,000,000 x ($1.015 - $1.010)}

5,000

Cash
Contract Payable
Cash
Contract Receivable

10,000

1,015,000
1,020,000

5,000

1,020,000
1,015,000

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Exercise 6
Storks General Journal
6/01/X5

Aviation gas contract option

Cash

6/30/X5

Aviation gas contract option

Other comprehensive income

20,000

Cash

30,000

8/01/X5

8/15/X5

Aviation gas contract option

Other comprehensive income

5,000

20,000

Aviation gas
Cash

200,000

Cost of goods sold

Aviation gas

200,000

Other comprehensive income

Cost of goods sold

5,000

25,000
5,000
200,000
200,000

25,000
25,000

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Exercise 7
Pelicans General Journal
12/31/X5

Forward contract
OCI

29,703

29,703

(1.35-1.50)x200,000/(1.01)1
Implicit
rate

1.32x200,000(1+r)3=1.35x200,000
r=0.007519
Discount Amortization

11/30
12/31
1/31

1985.04
1999.97
2015.00

12/31/X5

Exchange Loss 1985.042+1999.968

OCI

02/01/X6

Balance
264000
265985
267985
270000
3985
3985

Forward contract
AOCI

10,297

Cash (1.55-1.35)x200,000
Forward contract

40,000

10,297
40,000

Equipment
Cash

310,000

Equipment
OCI

2015

310,000

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2015

Exercise 8
Darters General Journal
Date
11/01/X1

11/01/X1

Account Name
Machinery
Accounts Payable:
Jacana(pesos)

Debit
100,000

Contract Receivable-pesos
Contract Payable:AB Trader

102,000

100,000

102,000

12/31/X1

Accounts Payable: Jacana(pesos)

Exchange Gain

2,000

12/31/X1

Unrealized Loss on Contract

Contract Receivable-pesos
{($.101 - $.102)(1,000,000)}

1,000

Exchange Loss
Accounts Payable:
Jacana(pesos)

9,000

Contract Receivable-pesos
Unrealized Gain on Contract

6,000

01/30/X2

Credit

2,000
1,000

9,000

6,000

Cash-pesos
Contract payable:AB Trader
Contract Receivable-pesos
Cash

107,000
102,000

Accounts Payable:Jacana(pesos)
Cash-pesos

107,000

107,000
102,000
107,000

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Exercise 9
Date
Nov 01
Dec 31
Jan 30

Direct Method
1W = $.001333
1W = $.001369
1W = $.001428

Indirect Method
$1 = W750
$1 = W730
$1 = W700

GANNETs General Journal

11/01/X1

Inventory
Accounts Payable: Seoul

800,000
800,000

(600,000,000/W750 per $1)

11/01/X1

Deposit Receivable: Tokyo

Cash

900,000

900,000

Value of deposit in won:

$900,000 x 750 won/ $1 =
675,000,000 won
12/31/X1

Deposit Receivable: Tokyo

Exchange Loss
Accounts Payable: Seoul
Exchange Gain

24,658
21,918

21,918
24,658

Account Payable:
600,000,000/W730 = $821,918
$821,918 - $800,000 = $21,918
Deposit Receivable:
675,000,000/W730 = $924,658
$924,658 - $900,000 = $24,658
01/30/X2

Deposit Receivable: Tokyo

Exchange Loss
Exchange Gain
Accounts Payable: Seoul

39,628
35,225
39,628
35,225

Account Payable:
600,000,000/W700 = $857,143
$857,143 - $821,918 = $35,225
Deposit Receivable:
675,000,000/W700 = $964,286
$964,286 - $924,658 = $39,628
2009 Pearson Education, Inc. publishing as Prentice Hall
12-21

01/30/X2

Accounts Payable: Seoul

Cash

857,143

01/30/X2

Cash
Deposits Receivable: Tokyo

964,286

857,143
964,286

Exercise 10
Frigatebirds General Journal
11/1/X5
12/31/X5

Accounts receivable
Sales
Exchange rate loss
Accounts receivable

1,369,863
1,369,863
36,530

36,530

1,369,863-1,333,333=36,530

02/01/X6

Forward contract
Exchange rate gain

36,530

Exchange rate loss

Accounts receivable

67,510

Forward contract
Exchange rate gain

67,510

36,530
67,510
67,510

1,333,333-1,265,823=67,510
Cash

Accounts receivable
Forward contract

1,369,863

1,265,823
104,040

2009 Pearson Education, Inc. publishing as Prentice Hall

12-22