Chapter 09 Advanced Solutions

CHAPTER 9
FOREIGN CURRENCY TRANSACTIONS AND

HEDGING FOREIGN EXCHANGE RISK
Answers to Questions
1. Under the two-transaction perspective, an export sale (import purchase) and the
subsequent collection (payment) of cash are treated as two separate transactions to be
accounted for separately. The idea is that management has made two decisions: (1) to
make the export sale (import purchase), and (2) to extend credit in foreign currency to the
foreign customer (obtain credit from the foreign supplier). The income effect from each of
these decisions should be reported separately.
2. Foreign currency receivables resulting from export sales are revalued at the end of
accounting periods using the current spot rate. An increase in the value of a receivable
will be offset by reporting a foreign exchange gain in net income, and a decrease will be
offset by a foreign exchange loss. Foreign exchange gains and losses are accrued even
though they have not yet been realized.
3. Foreign exchange gains and losses are created by two factors: having foreign currency
exposures (foreign currency receivables and payables) and changes in exchange rates.
Appreciation of the foreign currency will generate foreign exchange gains on receivables
and foreign exchange losses on payables. Depreciation of the foreign currency will
generate foreign exchange losses on receivables and foreign exchange gains on
payables.
4. Hedging is the process of eliminating exposure to foreign exchange risk so as to avoid

potential losses from fluctuations in exchange rates. In addition to avoiding possible
losses, companies hedge foreign currency transactions and commitments to introduce an
element of certainty into the future cash flows resulting from foreign currency activities.
Hedging involves establishing a price today at which foreign currency can be sold or
purchased at a future date.
5. A party to a foreign currency forward contract is obligated to deliver one currency in

exchange for another at a specified future date, whereas the owner of a foreign currency
option can choose whether to exercise the option and exchange one currency for another
or not.
6. Hedges of foreign currency denominated assets and liabilities are not entered into until a
foreign currency transaction (import purchase or export sale) has taken place. Hedges of
firm commitments are made when a purchase order is placed or a sales order is received,
before a transaction has taken place. Hedges of forecasted transactions are made at the
time a future foreign currency purchase or sale can be anticipated, even before an order
has been placed or received.
7. Foreign currency options have an advantage over forward contracts in that the holder of
the option can choose not to exercise if the future spot rate turns out to be more
advantageous. Forward contracts, on the other hand, can lock a company into an
unnecessary loss (or a reduced gain). The disadvantage associated with foreign currency
options is that a premium must be paid up front even though the option might never be
exercised.
8. SFAS 133 requires an enterprise to recognize all derivative financial instruments as assets
or liabilities on the balance sheet and measure them at fair value.
9. The fair value of a foreign currency forward contract is determined by reference to

changes in the forward rate over the life of the contract, discounted to the present value.
Three pieces of information are needed to determine the fair value of a forward contract at
any point in time during its life: (a) the contracted forward rate when the forward contract
is entered into, (b) the current forward rate for a contract that matures on the same date
as the forward contract entered into, and (c) a discount rate; typically, the companys
incremental borrowing rate.
The manner in which the fair value of a foreign currency option is determined depends on
whether the option is traded on an exchange or has been acquired in the over the counter
market. The fair value of an exchange-traded foreign currency option is its current market
price quoted on the exchange. For over the counter options, fair value can be determined
by obtaining a price quote from an option dealer (such as a bank). If dealer price quotes
are unavailable, the company can estimate the value of an option using the modified
Black-Scholes option pricing model. Regardless of who does the calculation, principles
similar to those in the Black-Scholes pricing model will be used in determining the value of
the option.
10. Hedge accounting is defined as recognition of gains and losses on the hedging instrument
in the same period as the recognition of gains and losses on the underlying hedged asset
or liability (or firm commitment).
11. For hedge accounting to apply, the forecasted transaction must be probable (likely to
occur), the hedge must be highly effective in offsetting fluctuations in the cash flow
associated with the foreign currency risk, and the hedging relationship must be properly
documented.
12. In both cases, (1) sales revenue (or the cost of the item purchased) is determined using
the spot rate at the date of sale (or purchase), and (2) the hedged asset or liability is
adjusted to fair value based on changes in the spot exchange rate with a foreign
exchange gain or loss recognized in net income.
For a cash flow hedge, the derivative hedging instrument is adjusted to fair value
(resulting in an asset or liability reported on the balance sheet), with the counterpart
recognized as a change in Accumulated Other Comprehensive Income (AOCI). An
amount equal to the foreign exchange gain or loss on the hedged asset or liability is then
transferred from AOCI to net income; the net effect is to offset any gain or loss on the
hedged asset or liability. An additional amount is removed from AOCI and recognized in
net income to reflect (a) the current periods amortization of the original discount or
premium on the forward contract (if a forward contract is the hedging instrument) or (b) the
change in the time value of the option (if an option is the hedging instrument).
For a fair value hedge, the derivative hedging instrument is adjusted to fair value (resulting
in an asset or liability reported on the balance sheet), with the counterpart recognized as a
gain or loss in net income. The discount or premium on a forward contract is not allocated
to net income. The change in the time value of an option is not recognized in net income.
13. For a fair value hedge of a foreign currency asset or liability (1) sales revenue (cost of
purchases) is recognized at the spot rate at the date of sale (purchase) and (2) the
hedged asset or liability is adjusted to fair value based on changes in the spot exchange
rate with a foreign exchange gain or loss recognized in net income. The forward contract
is adjusted to fair value based on changes in the forward rate (resulting in an asset or
liability reported on the balance sheet), with the counterpart recognized as a gain or loss
in net income. The foreign exchange gain (loss) and the forward contract loss (gain) are
likely to be of different amounts resulting in a net gain or loss reported in net income.
For a fair value hedge of a firm commitment, there is no hedged asset or liability to
account for. The forward contract is adjusted to fair value based on changes in the forward
rate (resulting in an asset or liability reported on the balance sheet), with a gain or loss
recognized in net income. The firm commitment is also adjusted to fair value based on
changes in the forward rate (resulting in a liability or asset reported on the balance sheet),
and a gain or loss on firm commitment is recognized in net income. The firm commitment
gain (loss) offsets the forward contract loss (gain) resulting in zero impact on net income.
Sales revenue (cost of purchases) is recognized at the spot rate at the date of sale
(purchase). The firm commitment account is closed as an adjustment to net income in the
period in which the hedged item affects net income.
14. For a cash flow hedge of a foreign currency asset or liability (1) sales revenue (cost of
purchases) is recognized at the spot rate at the date of sale (purchase) and (2) the
hedged asset or liability is adjusted to fair value based on changes in the spot exchange
rate with a foreign exchange gain or loss recognized in net income. The forward contract
is adjusted to fair value (resulting in an asset or liability reported on the balance sheet),
with the counterpart recognized as a change in Accumulated Other Comprehensive
Income (AOCI). An amount equal to the foreign exchange gain or loss on the hedged
asset or liability is then transferred from AOCI to net income; the net effect is to offset any
gain or loss on the hedged asset or liability. An additional amount is removed from AOCI
and recognized in net income to reflect the current periods allocation of the discount or
premium on the forward contract.
For a hedge of a forecasted transaction, the forward contract is adjusted to fair value
(resulting in an asset or liability reported on the balance sheet), with the counterpart
recognized as a change in Accumulated Other Comprehensive Income (AOCI). Because
there is no foreign currency asset or liability, there is no transfer from AOCI to net income
to offset any gain or loss on the asset or liability. The current periods allocation of the
forward contract discount or premium is recognized in net income with the counterpart
reflected in AOCI. Sales revenue (cost of purchases) is recognized at the spot rate at the
date of sale (purchase). The amount accumulated in AOCI related to the hedge is closed
as an adjustment to net income in the period in which the forecasted transaction was
anticipated to occur.
15. In accounting for a fair value hedge, the change in the fair value of the foreign currency
option is reported as a gain or loss in net income. In accounting for a cash flow hedge,
the change in the entire fair value of the option is first reported in other comprehensive
income, and then the change in the time value of the option is reported as an expense in
net income.
16. The accounting for a foreign currency borrowing involves keeping track of two foreign
currency payablesthe note payable and interest payable. As both the face value of the
borrowing and accrued interest represent foreign currency liabilities, both are exposed to
foreign exchange risk and can give rise to foreign currency gains and losses.
Answers to Problems
1. C An import purchase causes a foreign currency payable to be carried on

the books. If the foreign currency depreciates, the dollar value of the
foreign currency payable decreases, yielding a foreign exchange gain.
2. D SFAS 52 requires a two-transaction perspective, accrual approach.
3. B Foreign exchange gains related to foreign currency import purchases are

treated as a component of income before income taxes. If there is no
foreign exchange gain in operating income, then the purchase must have
been denominated in U.S. dollars or there was no change in the value of
the foreign currency from October 1 to December 1, 2009.
4. C The dollar value of the LCU receivable has decreased from $110,000 at
December 31, 2009 to $95,000 at February 15, 2010. This decrease of
$15,000 should be reported as a foreign exchange loss in 2010.
5. D The increase in the dollar value of the euro note payable represents a
foreign exchange loss. In this case a $25,000 loss would have been
accrued in 2009 and a $10,000 loss will be reported in 2010.
6. D A foreign currency receivable will generate a foreign exchange gain when

the foreign currency increases in dollar value. A foreign currency payable
will generate a foreign exchange gain when the foreign currency
decreases in dollar value. Hence, the correct combination is franc
(increase) and peso (decrease).
7. D The merchandise purchase results in a foreign exchange loss of $8,000,

the difference between the U.S. dollar equivalent at the date of purchase
and at the date of settlement.
The increase in the dollar equivalent of the notes principal results in a
foreign exchange loss of $20,000.
The total foreign exchange loss is $28,000 ($8,000 + $20,000).
8. D The Thai baht is selling at a premium (forward rate exceeds spot rate).
The exporter will receive more dollars as a result of selling the baht
forward than if the baht had been received and converted into dollars on
April 1. Thus, the premium results in additional revenue for the exporter.
9. D The parts inventory will be recognized at the spot rate at the date of
purchase (FC100,000 x $.23 = $23,000).
10. D The forward contract must be reported on the December 31, 2009 balance
sheet as a liability. Barnum has locked-in to purchase ringgits at $0.042
per ringgit but could have locked-in to purchase ringgits at $0.037 per
ringgit if it had waited until December 31 to enter into the forward
contract. The forward contract must be reported at its fair value
discounted for two months at 12% [($.042 $.037) x 1,000,000 = $5,000 x .
9803 = $4,901.50].
11. C The 10 million won receivable has changed in dollar value from $35,000 at
12/1/09 to $33,000 at 12/31/09. The won receivable will be written down by
$2,000 and a foreign exchange loss will be reported in 2009 income.
12. B The nominal value of the forward contract on December 31, 2009 is a
positive $2,000, the difference between the amount to be received from the
forward contract actually entered into, $34,000 ($.0034 x 10 million), and
the amount that could be received by entering into a forward contract on
December 31, 2009 that matures on March 31, 2010, $32,000 ($.0032 x 10
million). The fair value of the forward contract is the present value of
$2,000 discounted for two months ($2,000 x .9706 = $1,941.20). On
December 31, 2009, MNC Corp. will recognize a $1,941.20 gain on the
forward contract and a foreign exchange loss of $2,000 on the won
receivable. The net impact on 2009 income is $58.80.
13. A The krona is selling at a premium in the forward market, causing Pimlico
to pay more dollars to acquire kroner than if the kroner were purchased at
the spot rate on March 1. Therefore, the premium results in an expense of
$10,000 [($.12 $.10) x 500,000].
The Adjustment to Net Income is the amount accumulated in Accumulated
Other Comprehensive Income (AOCI) as a result of recognizing the
premium expense and the fair value of the forward contract. The journal
entries would be as follows:
3/1 no journal entries
6/1 Premium Expense $10,000

AOCI $10,000
AOCI $2,500
Forward Contract $2,500
Foreign Currency $57,500

Forward Contract 2,500
Cash $60,000
AOCI $7,500
Adjustment to Net Income $7,500
14. C This is a cash flow hedge of a forecasted transaction. The original cost of
the option is recognized as an Option Expense over the life of the option.
15. B
16. D
The easiest way to solve problems 15 and 16 is to prepare journal entries

for the option fair value hedge and the firm commitment. The journal
entries are as follows:
9/1/09
Foreign Currency Option $2,000
Cash $2,000
12/31/09
Foreign Currency Option $300
Gain on Foreign Currency Option $300
Loss on Firm Commitment $980.30

Firm Commitment $980.30
[($.79 $.80) x 100,000 = $1,000 x .9803 = $980.30]
Net impact on 2009 net income:

Gain on Foreign Currency Option $300.00
Loss on Firm Commitment (980.30)
$(680.30)
3/1/10
Loss on Firm Commitment $2,019.70

Firm Commitment $2,019.70
[($.77 $.80) x 100,000 = $3,000 $980.30 = $2,019.70]
Foreign Currency (C$) $77,000

Sales $77,000
Cash $80,000
Foreign Currency (C$) $77,000
Foreign Currency Option 3,000
Firm Commitment $3,000

16. (continued)

Gain on Foreign Currency Option $ 700.00
Loss on Firm Commitment (2,019.70)
Sales 77,000.00
Adjustment to Net Income 3,000.00
$78,680.30
17. B Net cash inflow with option ($80,000 $2,000) $78,000

Cash inflow without option (at spot rate of $.77) 77,000
Net increase in cash inflow $ 1,000
18 and 19.

for the forward contract fair value hedge of a firm commitment. The journal
3/1 no journal entries
3/31 Forward Contract $1,250

Gain on Forward Contract $1,250
($1,250 $0)
Loss on Firm Commitment $1,250

Net impact on first quarter net income is $0.

18 and 19. (continued)
4/30 Loss on Forward Contract $250

Forward Contract $250
[Fair value of forward contract is
($.120 $.118) x 500,000 = $1,000;
$1,000 $1,250 = $250]
Firm Commitment $250

Gain on Firm Commitment $250
Foreign Currency (pesos) $59,000

Sales [500,000 pesos x $.118] $59,000
Cash [500,000 x $.120] $60,000

Foreign Currency (pesos) $59,000

Net impact on second quarter net income is: Sales $59,000 Loss on
Forward Contract $250 + Gain on Firm Commitment $250 + Adjustment to
Net Income $1,000 = $60,000.
18. A
19. C
20. B Cash inflow with forward contract [500,000 pesos x $.12] $60,000
Cash inflow without forward contract [500,000 pesos x $.118] 59,000
Net increase in cash flow from forward contract $ 1,000
21 and 22.

for the option cash flow hedge of a forecasted transaction. The journal
11/1/09
Cash $1,500
12/31/09
Option Expense $400
(The option has no intrinsic value at 12/31/09 so the entire change in fair
value is due to a change in time value; $1,500 $1,100 = $400 decrease
in time value. The decrease in time value of the option is recognized as
an expense in net income.)
Option Expense decreases net income by $400.
2/1/10
Option Expense $1,100
Foreign Currency Option 900
Accumulated Other Comprehensive Income (AOCI) $2,000
(Record expense for the decrease in time value of the
option; $1,100 $0 = $1,100; and write-up option to fair
value ($.40 $.41) x 200,000 = $2,000 $1,100 = $900.)
Foreign Currency (BRL) [200,000 x $.41] $82,000

Cash [200,000 x $.40] $80,000
Parts Inventory (Cost-of-Goods-Sold) $82,000

Foreign Currency (BRL) $82,000

21 and 22. (continued)

Option Expense $ (1,100)
Cost-of-Goods-Sold (82,000)
Adjustment to Net Income 2,000
Decrease in Net Income $ (81,100)
21. B
22. C
23. (10 minutes) (Foreign Currency Purchase/Payable)
The decrease in the dollar value of the LCU payable from November 1 (60,000
x .345 = $20,700) to December 31 (60,000 x .333 = $19,980) is recorded as a
$720 foreign exchange gain in 2009. The increase in the dollar value of the
LCU payable from December 31 ($19,980) to January 15 (60,000 x .359 =
$21,540) is recorded as a $1,560 foreign exchange loss in 2010.
24. (10 minutes) (Foreign Currency Sale/Receivable)
The ostra receivable decreases in dollar value from (50,000 x $1.05) $52,500
at December 20 to $51,000 (50,000 x $1.02) at December 31, resulting in a
foreign exchange loss of $1,500 in 2009. The further decrease in dollar value
of the ostra receivable from $51,000 at December 31 to $49,000 (50,000 x $.98)
at January 10 results in an additional $2,000 foreign exchange loss in 2010.
25. (10 minutes) (Foreign Currency Sale/Receivable)
9/15 Accounts Receivable (FCU) [100,000 x $.40] $40,000

Sales $40,000
9/30 Accounts Receivable (FCU) $2,000

Foreign exchange Gain $2,000
[100,000 x ($.42 $.40)]
10/15 Foreign Exchange Loss $5,000

Accounts Receivable (FCU)
[100,000 x ($.37 $.42)] $5,000
Cash $37,000
Accounts Receivable (FCU) $37,000
26. (10 minutes) (Foreign Currency Purchase/Payable)
12/1/09 Inventory $52,800

Accounts Payable (LCU) [60,000 x $.88] $52,800
12/31/09 Accounts Payable (LCU) [60,000 x ($.82 $.88)] $3,600

Foreign Exchange Gain $3,600
1/28/10 Foreign Exchange Loss $4,800

Accounts Payable (LCU) [60,000 x ($.90 $.82)] $4,800
Accounts payable (LCU) $54,000

Cash $54,000
27. (15 minutes) (Determine U.S. Dollar Balance for Foreign Currency
Transactions)
Inventory and Cost of Goods Sold are reported at the spot rate at the date the
inventory was purchased. Sales are reported at the spot rate at the date of
sale. Accounts Receivable and Accounts Payable are reported at the spot rate
at the balance sheet date. Cash is reported at the spot rate when collected
and the spot rate when paid.
Inventory [50,000 pesos x 40% x $.17]..........................................................$3,400

COGS [50,000 pesos x 60% x $.17]................................................................$5,100
Sales [45,000 pesos x $.18]............................................................................$8,100
Accounts Receivable [45,000 40,000 = 5,000 pesos x $.21].....................$1,050
Accounts Payable [50,000 30,000 = 20,000 pesos x $.21]........................$4,200
Cash [(40,000 x $.19) (30,000 x $.20)].........................................................$1,600
28. (25 minutes) (Prepare Journal Entries for Foreign Currency Transactions)
2/1/09 Equipment $17,600

Accounts Payable (L) [40,000 x $.44] $17,600
4/1/09 Accounts Payable (L) $17,600

Foreign Exchange Loss 400
Cash [40,000 x $.45] $18,000
6/1/09 Inventory $14,100

Accounts Payable (L) [30,000 x $.47] $14,100
8/1/09 Accounts Receivable (L) [40,000 x $.48] $19,200

Sales $19,200
Cost of Goods Sold $9,870

Inventory [$14,100 x 70%] $9,870
10/1/09 Cash [30,000 x $.49] $14,700

Accounts Receivable (L) [$19,200 x 3/4] $14,400
Foreign Exchange Gain 300
11/1/09 Accounts Payable (L) [$14,100 x 2/3] $9,400

Foreign Exchange Loss [20,000 x ($.50 $.47)] 600
Cash [20,000 x $.50] $10,000
12/31/09 Foreign Exchange Loss $500

Accounts Payable (L) [10,000 x ($.52 $.47)] $500
Accounts receivable (L) [10,000 x ($.52 $.48)] $400

Foreign Exchange Gain $400
2/1/10 Cash [10,000 x $.54] $5,400

Accounts Receivable (L) [10,000 x $.52] $5,200
Foreign Exchange Gain 200
3/1/10 Accounts Payable (L) [10,000 x $.52] $5,200

Foreign Exchange Loss 300
Cash [10,000 x $.55] $5,500
29. (20 minutes) (Determine Income Effect of Foreign Currency
Purchase/Payable)
a. Benjamin, Inc. has a liability of AL 160,000. On the date that this liability
was created (December 1, 2009), the liability had a dollar value of
$70,400 (AL 160,000 x $.44). On December 31, 2009, the dollar value has
risen to $76,800 (AL 160,000 x $.48). The increase in the dollar value of
the liability creates a foreign exchange loss of $6,400 ($76,800 $70,400)
in 2009.
By March 1, 2010, when the liability is paid, the dollar value has dropped
to $72,000 (AL 160,000 x $.45) creating a foreign exchange gain of $4,800
($72,000 $76,800) to be reported in 2010.
b. Benjamin, Inc. has a liability of AL 160,000. On the date that this liability
was created (September 1, 2009), the liability had a dollar value of
$73,600 (AL 160,000 x $.46). On December 1, 2009, when the liability is
paid, the dollar value has decreased to $70,400 (AL 160,000 x $.44). The
drop in the dollar value of the liability creates a foreign exchange gain of
$3,200 ($70,400 $73,600) in 2009.
c. Benjamin, Inc. has a liability of AL 160,000. On the date that this liability
was created (September 1, 2009), the liability had a dollar value of
$73,600 (AL 160,000 x $.46). On December 31, 2009, the dollar value has
risen to $76,800 (AL 160,000 x $.48). The increase in the dollar value of
the liability creates a foreign exchange loss of $3,200 ($76,800 $73,600)
in 2009.
By March 1, 2010, when the liability is paid, the dollar value has dropped
to $72,000 (AL 160,000 x $.45) creating a foreign exchange gain of $4,800
($72,000 $76,800) to be reported in 2010.
30. (30 minutes) (Foreign Currency Borrowing)
a. 9/30/09 Cash $100,000

Note Payable (dudek) [1,000,000 x $.10] $100,000
(To record the note and conversion of 1 million
dudeks into $ at the spot rate.)
12/31/09 Interest Expense $525

Interest Payable (dudek) $525
[1,000,000 x 2% x 3/12 = 5,000 dudeks x
$.105 spot rate]
(To accrue interest for the period 9/30 12/31/09.)
Foreign Exchange Loss $5,000

Note payable (dudek) [1 m x ($.105 $.10)] $5,000
(To revalue the note payable at the spot rate of
$.105 and record a foreign exchange loss.)
9/30/10 Interest Expense [15,000 dudeks x $.12] $1,800

Interest Payable (dudek) 525
Foreign Exchange Loss [5,000 dudeks x
($.12 $.105)] 75
Cash [20,000 dudeks x $.12] $2,400
(To record the first annual interest payment,
record interest expense for the period 1/1 9/30/10,
and record a foreign exchange loss on the
interest payable accrued at 12/31/09.)
12/31/10 Interest Expense $625

Interest Payable (dudek) [5,000 dudeks x $.125] $625
(To accrue interest for the period 9/30 12/31/10.)
Foreign Exchange Loss $20,000

Note Payable (dudek) [1 m x ($.125 $.105)] $20,000
(To revalue the note payable at the spot rate of
$.125 and record a foreign exchange loss.)
30. (continued)
9/30/11 Interest Expense [15,000 dudeks x $.15] $2,250

Interest Payable (dudek) 625
Foreign Exchange Loss [5,000 dudeks x
($.15 $.125)] 125
Cash [20,000 dudeks x $.15] $3,000
(To record the second annual interest payment,
record interest expense for the period 1/1 9/30/11,
and record a foreign exchange loss on the interest
payable accrued at 12/31/10.)
Note Payable (dudek) $125,000

Foreign Exchange Loss 25,000
Cash [1 m dudeks x $.15] $150,000
(To record payment of the 1 million dudek note.)
b. The effective cost of borrowing can be determined by considering the total

interest expense and foreign exchange losses related to the loan and
comparing this with the amount borrowed:
2009
Interest expense $525
Foreign exchange loss 5,000
Total $5,525 / $100,000 = 5.525% for 3 months =
= 22.1% for 12 months
2010
Interest expense $2,425
Foreign exchange losses 20,075
Total $22,500 / $100,000 = 22.5% for 12 months
2011
Interest expense $2,250
Foreign exchange losses 25,125
Total $27,375 / $100,000 = 27.38% for 9 months

Because of appreciation in the value of the dudek, the effective annual
borrowing costs range from 22.1% 36.5%.
30. (continued)
The net cash flow from this borrowing is:
Cash outflows:
Interest ($2,400 + $3,000) $5,400
Principal 150,000
$155,400
Cash inflow:
Borrowing (100,000)
Net cash outflow $ 55,400
Ignoring compounding, this results in an effective borrowing cost of

approximately 27.7% per year [$55,400 / $100,000 = 55.4% over two years / 2
years = 27.7% per year].
31. (40 minutes) (Forward Contract Hedge of Foreign Currency Receivable)
a. Cash Flow Hedge
12/1/09 Accounts Receivable (K) [20,000 x $2.00] $40,000

Sales $40,000
No entry for the forward contract.
12/31/09 Accounts Receivable (K) $2,000

[20,000 x ($2.10-$2.00)]
AOCI $2,450.75
Forward Contract $2,450.75
[20,000 x ($2.075 $2.20) = $2,500 x .9803 = $2,450.75]
Loss on Forward Contract $2,000

AOCI $2,000
AOCI $500
Premium Revenue $500
[20,000 x ($2.075 $2.00) = $1,500 x 1/3 = $500]
31. (continued)
Impact on 2009 income:

Sales $40,000
Foreign Exchange Gain 2,000
Loss on Forward Contract (2,000)
Premium Revenue 500
Total $40,500

[20,000 x ($2.25 $2.10)]
AOCI $1,049.25
Forward Contract
$1,049.25
[20,000 x ($2.25 $2.075) = $3,500 2,450.75] = $1,049.25

AOCI $3,000
AOCI $1,000
Premium Revenue $1,000
[$1,500 x 2/3 = $1,000]
Foreign Currency (K) [20,000 x $2.25] $45,000

Accounts Receivable (K) $45,000
Cash [20,000 x $2.075] $41,500

Foreign Currency (K) $45,000

Premium Revenue 1,000
Total $1,000
Impact on net income over both periods: $40,500 + $1,000 = $(41,500); equal
to cash inflow.
31. (continued)
b. Fair Value Hedge
12/1/09 Accounts Receivable (K) [20,000 x $2.00] $40,000

Sales $40,000

[20,000 x ($2.10 $2.00)]
Loss on Forward Contract $2,450.75

Forward contract $2,450.75
[20,000 x ($2.075 $2.20) = $2,500 x .9803 = $2,450.75]

Sales $40,000.00
Foreign exchange gain 2,000.00
Loss on forward contract (2,450.75)
Total $39,549.25

[20,000 x ($2.25 $2.10)]

[20,000 x (2.25 $2.075) = $3,500 2,450.75 = $1.049.25]

Accounts Receivable (K) $45,000
Cash [20,000 x $2.075] $41,500

Foreign Currency (K) $45,000

Foreign Exchange Gain $3,000.00
Loss on Forward Contract (1,049.25)
Total $1,950.75
Impact on net income over both periods: $39,549.25 + $1,950.75 = $41,500;

equal to cash inflow.
32. (40 minutes) (Forward Contract Hedge of Foreign Currency Payable)

a. Cash Flow Hedge
12/1/09Parts Inventory (COGS) $40,000

Accounts Payable (K) $40,000
[20,000 x $2.00]
No entry for the Forward Contract.

[20,000 x ($2.10 $2.00)]

AOCI $2,450.75
[20,000 x ($2.075 $2.20) = $2,500 x .9803 = $2,450.75]
AOCI $2,000
Premium Expense $500

AOCI $500
[20,000 x ($2.075 $2.00) = $1,500 x 1/3 = $500]

Parts Inventory (COGS) $(40,000)
Foreign Exchange Loss (2,000)
Gain on forward contract 2,000
Premium Expense (500)
Total $(40,500)
32. (continued)

[20,000 x ($2.25 $2.10)]

AOCI $1,049.25
[20,000 x ($2.25 $2.075) = $3,500 2,450.75 = $1,049.25]
AOCI $3,000
Premium Expense $1,000

AOCI $1,000
[$1,500 x 2/3 = $1,000]

Cash $41,500

Foreign currency (K) $45,000

Foreign Exchange Loss $(3,000)
Loss on Forward Contract 3,000
Premium revenue (1,000)
Total $(1,000)
Impact on net income over both periods: $(40,500) + $(1,000) = $(41,500);

equal to cash outflow.
32. (continued)
b. Fair Value Hedge
12/1/09Parts Inventory (COGS) $40,000

[20,000 x $2.00]

[20,000 x ($2.10 $2.00)]

Gain on Forward Contract $2,450.75
[20,000 x ($2.075 $2.20) = $2,500 x .9803 = $2,450.75]

Parts Inventory (COGS) $(40,000.00)
Foreign Exchange Loss (2,000.00)
Gain on forward contract 2,450.75
Total $(39,549.25)

[20,000 x ($2.25 $2.10)]

[20,000 x ($2.25 $2.075) = $3,500 2,450.75 = $1,049.25]

Cash $41,500

Foreign currency (K) $45,000
32. (continued)

Foreign Exchange Loss $(3,000.00)
Gain on Forward Contract 1,049.25
Total $(1,950.75)
Impact on net income over both periods: $(39,549.25) + $(1,950.75) =

$(41,500.00); equal to cash outflow.
33. (30 minutes) (Option Hedge of Foreign Currency Receivable)
a. Cash Flow Hedge
6/1 Accounts Receivable (P) $45,000

Sales [$.045 x 1,000,000 pesos] $45,000
Foreign Currency Option

$2,000
Cash
$2,000

Foreign Exchange Gain
[($.048 $.045) x 1,000,000] $3,000
Accumulated Other Comprehensive

Income (AOCI) $200
[($.0018 $.0020) x 1,000,000]
Loss on Foreign Currency Option $3,000

Income (AOCI) $3,000
Option Expense $200

Income (AOCI) $200
Date Fair Value Intrinsic Value Time Value Change in Time Value
6/1 $2,000 $0 $2,000
6/30 $1,800 $0 $1,800 $ 200
9/1 $1,000 $1,000 $0 $1,800
33. (continued)

Accounts Receivable (P) $4,000
[($.044 $.048) x 1,000,000]

Income (AOCI) $800
[$1,800 $1,000]

Gain on Foreign Currency Option $4,000

(Change in time value of option recognized as expense)
Foreign Currency (P) $44,000

Cash $45,000
Over the two accounting periods, Sales are $45,000 and Option Expense is
$2,000. Net increase in cash is $43,000.
b. Fair Value Hedge

Sales [$.045 x 1,000,000] $45,000

Cash $2,000

[($.048 $.045) x 1,000,000]
Loss on Foreign Currency Option $200

33. (continued)

[($.044 $.048) x 1,000,000]


Cash $45,000
Impact on Net Income over the Two Accounting Periods:

Sales $45,000
Foreign Exchange Gain 3,000
Foreign Exchange Loss (4,000)
Loss on Foreign Currency Option (1,000)
Impact on Net Income $43,000
= Net cash inflow
34. (30 minutes) (Option Hedge of Foreign Currency Payable)
a. Cash Flow Hedge
6/1 Inventory [$.085 x 1,000,000] $85,000

Accounts Payable (M) $85,000

Cash $2,000

[($.088 .085) x 1,000,000]

[$4,000 $2,000]

Option Expense $1,000*

Date Fair Value Intrinsic Value Time Value Change in Time Value
6/1 $2,000 $0 $2,000 -
6/30 $4,000 $3,000 $1,000 -$1,000*
9/1 $5,000 $5,000 $0 -$1,000**
34. (continued)

[($.09 $.088) x 1,000,000]

[$5,000 $4,000]

Option Expense $1,000**

Foreign Currency (M) $90,000

Cash $85,000

Impact on net income:

Option Expense $ 2,000
Inventory (Cost of Goods Sold) 85,000
Cash outflow $87,000
34. (continued)
b. Fair Value Hedge
6/1 Inventory $85,000

[$.085 x 1,000,000]

Cash $2,000

[($.088 $.085) x 1,000,000]

[$4,000 $2,000]

[($.09 $.088) x 1,000,000]

[$5,000 $4,000]

Cash $85,000

Foreign currency (M) $90,000
Impact on net income:

Foreign Exchange Loss ($5,000)
Gain on Foreign Currency Option 3,000
Impact on net income ($2,000)
Inventory 85,000
Cash Outflow $87,000
35. (30 minutes) (Forward Contract Cash Flow Hedge of Foreign Currency
Denominated Asset)
Account Receivable (FCU) Forward Forward Contract

SpotU.S. DollarChange in U.S.Rate to Change in
Date RateValue Dollar Value 4/30/10 Fair Value Fair Value
11/01/09 $.53 $53,000 - $.52 $0 -
12/31/09 $.50 $50,000 -$3,000 $.48 $3,8441 +$3,844
4/30/10 $.49 $49,000 -$1,000 $.49 $3,0002 - $ 844
1
$52,000 $48,000 = $(4,000) x .961 = $3,844; where .961 is the present value factor for
four months at an annual interest rate of 12% (1% per month) calculated as 1/1.01 4.
2
$52,000 $49,000 = $3,000.
2009 Journal Entries
11/01/09 Accounts Receivable (FCU) $53,000

Sales $53,000
There is no entry for the forward contract.



Discount Expense $333.33

Accumulated Other Comprehensive Income (AOCI) $333.33
[100,000 x ($.53 $.52) = $1,000 x 2/6 = $333.33]
The impact on net income for the year 2009 is:

Sales $53,000.00
Foreign Exchange Loss (3,000.00)
Net gain (loss) 0.00
Discount Expense (333.33)
Impact on net income $52,666.67
35. (continued)


Accumulated Other Comprehensive Income (AOCI) $844

Forward Contract $844
Discount Expense $666.67

Accumulated Other Comprehensive Income (AOCI) $666.67
Foreign Currency (FCU) $49,000

Cash $52,000
Foreign Currency (FCU) $49,000

Foreign Exchange Loss $(1,000.00)
Net gain (loss) 0.00
Discount Expense (666.67)
Impact on net income $(666.67)
36. (30 minutes) (Forward Contract Fair Value Hedge of Net Foreign Currency
Denominated Asset)
Account Receivable (Payable) (mongs) Forward Forward Contract

Change in U.S. Rate to Change in
Date U.S. Dollar Value Dollar Value 1/31/10 Fair Value Fair Value
11/30/09 $265,000 ($159,000) - $.52 $0 -
12/31/09 $250,000 ($150,000) -$15,000 (-$9,000) $.48 $7,9211 +$7,921
1/31/10 $245,000 ($147,000) -$ 5,000 (-$3,000) $.49 $6,0002 - $1,921
1
$104,000 $96,000 = $(8,000) x .9901 = $7,921; where .9901 is the present value factor
for one month at an annual interest rate of 12% (1% per month) calculated as 1/1.01.
2
$104,000 $98,000 = $6,000.
11/30 Accounts Receivable (mongs) $265,000

Sales $265,000
[$.53 x 500,000 mongs]
Inventory $159,000
Accounts Payable $159,000
[$.53 x 300,000 mongs]
There is no formal entry for the Forward Contract.

Accounts Receivable (mongs) $15,000
Accounts Payable (mongs) $9,000



Sales $265,000
Net Foreign Exchange Loss $ (6,000)
Gain on Forward Contract 7,921
Net gain (loss) 1,921
Impact on net income $266,921
36. (continued)



Foreign Currency (mongs) $245,000


Cash $104,000

Net Foreign Exchange Loss $(2,000)
Impact on net income $(3,921)
The net effect on the balance sheet is an increase in cash of $104,000 and an
increase in inventory of $159,000 with a corresponding increase in retained
earnings of $263,000 ($266,921 $3,921).
37. (40 minutes) (Forward Contract Fair Value Hedge)
a. Foreign Currency Receivable
10/01 Accounts Receivable (LCU) $69,000

Sales (100,000 LCUs x $.69) $69,000
There is no formal entry for the forward contract.

[($.71 $.69) x 100,000]

[($.74 $.65) x 100,000 = $ 9,000 x .9901 = $ 8,910.90]

[($.72 $.71) x 100,000]
Forward Contract $ 1,910.90

Gain on Forward Contract $ 1,910.90
[($.72 $.65) x 100,000 = $ 7,000 loss 8,910.90 = $ 1,910.90 gain]
Foreign Currency (LCU) $72,000

Accounts Receivable (LCU) $72,000
Cash $65,000
The impact on net income:

Sale $69,000.00
Foreign Exchange Gain 3,000.00
Loss on Forward Contract (8,910.90)
Impact on net income $65,000.00 = Cash Inflow
37. (continued)
b. Foreign Currency Firm Sales Commitment
10/01 There is no entry to record either the sales agreement or the

forward contract as both are executory contracts.
12/31 Loss on Forward Contract $8,910.90


Gain on Firm Commitment $8,910.90
1/31 Forward Contract $1,910.90



Sales $72,000
Cash $65,000

Impact on Net Income:

Sales $72,000
Net loss on Forward Contract (7,000)
Net gain on Firm Commitment 7,000
Adjustment to Net Income (7,000)
$65,000 = Cash Inflow
38. (30 minutes) (Forward Contract Fair Value Hedge of a Foreign Currency Firm
Purchase Commitment)
Forward Forward Contract Firm Commitment
Rate to Change in Change in

Date 10/31 Fair Value Fair Value Fair Value Fair Value
8/1 $.30 $0 - $0 $0 -
9/30 $.325 $4,950.50 1 + $4,950.50 $(4,950.50)1 $4,950.50
10/31 $.320 (spot) $4,0002 $ 950.50 $(4,000)2 + $ 950.50
1
($65,000 $60,000) = $5,000 x .9901 = $4,950.5; where .9901 is the present value factor
for one month at an annual interest rate of 12% (1% per month) calculated as 1/1.01.
2
($64,000 $60,000) = $4,000.
8/1 There is no entry to record either the purchase agreement or the

forward contract as both are executory contracts.


10/31 Loss on Forward Contract $950.50

Forward Contract $950.50
Firm Commitment $950.50

Gain on Firm Commitment $950.50
Foreign Currency (rupees) $64,000

Cash $60,000
Inventories (Cost-of-goods-sold) $64,000

Foreign Currency (rupees) $64,000

The net cash outflow is $60,000. Assuming the inventory is sold in the fourth
quarter, the net impact on net income is negative $60,000:
Cost of goods sold $(64,000)

Adjustment to net income 4,000
Net impact on net income $(60,000)
39. (30 minutes) (Option Fair Value Hedge of a Foreign Currency Firm Sale
Commitment)
Firm Commitment Option Option
Spot Change in Premium Change in

Date Rate Fair Value Fair Value for 9/1 Fair Value Fair Value
6/1 $1.00 - - $0.010 $5,000 -
6/30 $0.99 $( 4,901.50)1 $ 4,901.50 $0.016 $8,000 + $3,000
9/1 $0.97 $(15,000)2 $10,098.50 $0.030 $15,000 + $7,000
1
$495,000 $500,000 = $(5,000) x .9803 = $(4,901.5), where .9803 is the present value
factor for two months at an annual interest rate of 12% (1% per month) calculated as
1/1.012.
2
$485,000 $500,000 = $(15,000).
6/1 Foreign Currency Option $5,000

Cash $5,000
There is no entry to record the sales agreement

because it is an executory contract.
6/30 Loss on Firm Commitment $4,901.50


The impact on net income for the second quarter is:

Loss on Firm Commitment $(4,901.50)
Gain on Foreign Currency Option 3,000.00
Impact on net income $(1,901.50)
39. (continued)
9/1 Loss on Firm Commitment $10,098.50


Foreign Currency (lek) $485,000

Sales $485,000
Cash $500,000
Foreign Currency (lek) $485,000

The impact on net income for the third quarter is:

Sales $485,000.00
Loss on Firm Commitment (10,098.50)
Gain on Foreign Currency Option 7,000.00
Adjustment to Net Income 15,000.00
Impact on net income $496,901.50
The impact on net income over the second and third quarters is:
$495,000 ($496,901.50 $1,901.50)
The net cash inflow resulting from the sale is: $500,000 $5,000 = $495,000
40. (20 minutes) (Option Fair Value Hedge of a Foreign Currency Firm Purchase
Commitment)
Firm Commitment Option Option

11/20 $.20 - - $.008 $400 -
a) 12/20 $.21 $(500)1 $500 $.0103 $500 + $100
b) 12/20 $.18 $1,0002 + $1,000 $.0004 $0 $400
1
$10,000 $10,500 = $(500).
2
$10,000 $9,000 = $1,000.
3
The premium on 12/20 for an option that expires on that date is equal to the options
intrinsic value. Given the spot rate on 12/20 of $.21, a call option with a strike price of
$.20 has an intrinsic value of $.01 per mark.
4
The premium on 12/20 for an option that expires on that date is equal to the options
intrinsic value. Given the spot rate on 12/20 of $.18, a call option with a strike price of
$.20 has no intrinsic value the premium on 12/20 is $.000.
a. The option strike price ($.20) is less than the spot rate ($.21) on December 20,
the date the parts are to be paid for. Therefore, Big Arber will exercise its
option. The journal entries are as follows:
11/20 Foreign Currency Option $400

Cash $400
There is no entry to record the purchase agreement
12/20 Loss on Firm Commitment $500

Foreign Currency (pijio) $10,500
Cash $10,000
Foreign Currency Option 500
Parts Inventory $10,500
Adjustment to Net Income $500
(Note that this last entry is not made until the
period when the parts inventory affects net income
through cost of goods sold.)
40. (continued)
b. The option strike price ($.20) is greater than the spot rate ($.18) on December
20, the date the parts are to be paid for. Therefore, Big Arber will allow the
option to expire unexercised. Foreign currency will be acquired at the spot
rate on December 20. The journal entries are as follows:
11/20 Foreign Currency Option $400

Cash $400
There is no entry to record the purchase agreement

12/20 Firm Commitment $1,000

Gain on Firm Commitment $1,000
Cash $9,000
(Note that this last entry is not made until the
period when the parts inventory affects net income
through cost of goods sold.)
41. (20 minutes) (Option Cash Flow Hedge of Forecasted Transaction)
12/15/09 Foreign Currency Option $5,000

Cash [1 million marks x $.005] $5,000
No journal entry related to the forecasted

transaction.

AOCI $3,000
To recognize the increase in the value of
the foreign currency option with the counterpart
recorded in AOCI.

AOCI $1,000
To recognize the decrease in the time value
of the option as expense.
[($.584 $.58) x 1,000,000 = $4,000 $3,000 = $1,000]

AOCI $2,000
To recognize the increase in the value of the
foreign currency option with the counterpart
recorded in AOCI.

AOCI $4,000
To recognize the decrease in the time value of
the option as expense.
Foreign Currency (marks) $590,000

Cash $580,000
Foreign Currency Options 10,000
To record exercise of the foreign currency
option at the strike price of $.58 and close
out the foreign currency option account.

Foreign Currency (marks) $590,000
To record the purchase of parts and payment
of 1 million marks to the supplier.
41. (continued)
AOCI $10,000
To transfer the amount accumulated in AOCI
as an adjustment to net income in the period
in which the forecasted transaction occurs.
Impact on net income: 2009 Option expense $(1,000)
2010 Cost of Goods Sold $(590,000)

Option Expense (4,000)
Adjustment to Net Income 10,000
$(584,000)
Net cash outflow for parts: $585,000 = ($5,000 + $580,000)
42. (60 minutes) (Foreign Currency Transaction, Forward Contract and Option
Hedge of Foreign Currency Liability, Forward Contract and Option Hedge of
Foreign Currency Firm Commitment)
a. Unhedged Foreign Currency Liability
9/15 Inventory $200,000

Accounts Payable (euro) $200,000


Foreign Currency (euro) $220,000

Cash $220,000

42. (continued)
b. Forward Contract Fair Value Hedge of a Recognized Foreign Currency

Liability
Accounts Payable (C) Forward Forward Contract

Spot U.S. Dollar Change in U.S. Rate to Change in
Date Rate Value Dollar Value 10/31 Fair Value Fair Value
9/15 $1.00 $200,000 - $1.06 $0 -
9/30 $1.05 $210,000 +$10,000 $1.09 $5,940.60 1 +$5,940.60
10/31 $1.10 $220,000 +$10,000 $1.10 $8,000.00 2 +$2,059.40
1
$218,000 $212,000 = $6,000 x .9901 = $5,940.60; where .9901 is the present value
factor for one month at an annual interest rate of 12% (1% per month) calculated as
1/1.01.
2
$220,000 $212,000 = $8,000.
9/15 Inventory $200,000

There is no formal entry for the forward contract.





Cash $212,000

42. (continued)
c. Forward Contract Fair Value Hedge of a Foreign Currency Firm Commitment
9/15 There is no formal entry for the forward contract or the purchase order.





Cash $212,000
Inventory $220,000

(Note that this last entry is not made until the period when the inventory
affects net income through cost of goods sold.)
42. (continued)
d. Option Cash Flow Hedge of a Recognized Foreign Currency Liability
The following schedule summarizes the changes in the components of the fair
value of the euro call option with a strike price of $1.00 for October 31.
Change Change
Spot Option Fair in Fair Intrinsic Time in Time
Date Rate Premium Value Value Value Value Value
09/15 $1.00 $.035 $7,000 - $0 $7,0001 -
09/30 $1.05 $.070 $14,000 + $7,000 $10,0002 $4,0002 - $3,000
10/31 $1.10 $.100 $20,000 + $6,000 $20,000 $03 - $4,000
1
Because the strike price and spot rate are the same, the option has no intrinsic
value. Fair value is attributable solely to the time value of the option.
2
With a spot rate of $1.05 and a strike price of $1.00, the option has an intrinsic
value of $10,000. The remaining $4,000 of fair value is attributable to time value.
3
The time value of the option at maturity is zero.
9/15 Inventory $200,000


Cash $7,000




42. (continued)





Cash $200,000

42. (continued)
e. Option Fair Value Hedge of a Foreign Currency Firm Commitment
Firm Commitment Option Foreign Currency Option

9/15 $1.00 $0 - $.035 $ 7,000 -
9/30 $1.05 $ (9,901) $ 9,901 1 $.070 $14,000 +$7,000
10/31 $1.10 $(20,000) $10,099 $.100 $20,000 +$6,000
1
$210,000 $200,000 = $(10,000) x .9901 = $(9,901), where .9901 is the present value
factor for one month at an annual interest rate of 12% (1% per month) calculated as
1/1.01.

Cash $7,000





Cash $200,000
Inventory $220,000

(Note that this last entry is not made until the period when the inventory
affects net income through cost of goods sold.)

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Chapter 09 Advanced Solutions

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CHAPTER 9

FOREIGN CURRENCY TRANSACTIONS AND

4. Hedging is the process of eliminating exposure to foreign exchange risk so as to avoid

5. A party to a foreign currency forward contract is obligated to deliver one currency in

9. The fair value of a foreign currency forward contract is determined by reference to

1. C An import purchase causes a foreign currency payable to be carried on

2. D SFAS 52 requires a two-transaction perspective, accrual approach.

3. B Foreign exchange gains related to foreign currency import purchases are

6. D A foreign currency receivable will generate a foreign exchange gain when

7. D The merchandise purchase results in a foreign exchange loss of $8,000,

3/1 no journal entries

6/1 Premium Expense $10,000

Foreign Currency $57,500

The easiest way to solve problems 15 and 16 is to prepare journal entries

Loss on Firm Commitment $980.30

Net impact on 2009 net income:

Loss on Firm Commitment $2,019.70

Foreign Currency (C$) $77,000

Firm Commitment $3,000

Net impact on 2010 net income:

17. B Net cash inflow with option ($80,000 $2,000) $78,000

The easiest way to solve problems 18 and 19 is to prepare journal entries

3/1 no journal entries

3/31 Forward Contract $1,250

Loss on Firm Commitment $1,250

Net impact on first quarter net income is $0.

4/30 Loss on Forward Contract $250

Firm Commitment $250

Foreign Currency (pesos) $59,000

Cash [500,000 x $.120] $60,000

Firm Commitment $1,000

The easiest way to solve problems 21 and 22 is to prepare journal entries

Option Expense decreases net income by $400.

Foreign Currency (BRL) [200,000 x $.41] $82,000

Parts Inventory (Cost-of-Goods-Sold) $82,000

Accumulated Other Comprehensive Income (AOCI) $2,000

Net impact on 2010 net income:

23. (10 minutes) (Foreign Currency Purchase/Payable)

24. (10 minutes) (Foreign Currency Sale/Receivable)

25. (10 minutes) (Foreign Currency Sale/Receivable)

9/15 Accounts Receivable (FCU) [100,000 x $.40] $40,000

9/30 Accounts Receivable (FCU) $2,000

10/15 Foreign Exchange Loss $5,000

12/1/09 Inventory $52,800

12/31/09 Accounts Payable (LCU) [60,000 x ($.82 $.88)] $3,600

1/28/10 Foreign Exchange Loss $4,800

Accounts payable (LCU) $54,000

Inventory [50,000 pesos x 40% x $.17]..........................................................$3,400

2/1/09 Equipment $17,600

4/1/09 Accounts Payable (L) $17,600

6/1/09 Inventory $14,100

8/1/09 Accounts Receivable (L) [40,000 x $.48] $19,200

Cost of Goods Sold $9,870

10/1/09 Cash [30,000 x $.49] $14,700

Foreign Exchange Gain 300

11/1/09 Accounts Payable (L) [$14,100 x 2/3] $9,400

12/31/09 Foreign Exchange Loss $500

Accounts receivable (L) [10,000 x ($.52 $.48)] $400

2/1/10 Cash [10,000 x $.54] $5,400

3/1/10 Accounts Payable (L) [10,000 x $.52] $5,200

a. 9/30/09 Cash $100,000

12/31/09 Interest Expense $525

Foreign Exchange Loss $5,000

9/30/10 Interest Expense [15,000 dudeks x $.12] $1,800