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Chap11_HW.docxACCT411-01 Chapter 11 Homework (Fall 2026)
Foreign Currency Transactions: Hedging and Hedge Accounting (E11-10 from the textbook)
Revisions: (1) Assume that Pumped Up Company purchased inventory, instead of equipment and (2) Assume that, on 3/1/X8, Pumped Up sold all the inventory bought for US$100,000 cash.
Part I: Forward contract is NOT designated as a hedge.
a. Entries:
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Foreign Currency Transaction (Import) |
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3/1/X8 |
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To record sale of inventory
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b. The effect of the foreign currency transactions on the income statement, including both the accounts payable and the forward contract, for the year ended December 31, 20X7
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☐ income ☐ loss ☐ no effect |
Show work or explain:
c. The effect of the foreign currency transactions on the income statement, including both the accounts payable and the forward contract, for the year ended December 31, 20X8
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= $ |
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☐ income ☐ loss ☐ no effect |
Show work or explain:
d. Overall effect of foreign currency transactions on the income statement, including both the accounts payable and the forward contract, for 20X7 and 20X8 combined
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= $ |
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☐ income ☐ loss ☐ no effect |
= Forward ☐ premium ☐ discount at 12/16/ X7 |
Show work or explain:
e. The gross profit to be reported in the 20X8 income statement
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= $ |
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Show work or explain: (Note: Gross profit = Net sales – COGS. MUST memorize!)
f. Overall effect of these transactions (foreign currency transactions and gross profit) on net income from 20X7 to 20X8
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= $ |
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☐ income ☐ loss ☐ no effect |
Show work or explain:
Part II: Forward contract is designated as a cash flow hedge.
a. Entries: ( Hint: Entries are similar to or the same as for Part I.)
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Hedged Item |
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Hedging Instrument: Cash Flow Hedge |
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12/16/X7 |
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For inventory purchase, show work:
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Note: You can make an entry as shown in the textbook. If you do so, make sure that both accounts have zero balance after 2/14/X8. Show work or explanations:
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12/31/X7 |
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For year-end adjustment, show work:
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For year-end adjustment, show work:
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To offset FC TX G/L on the hedged item |
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2/14/X8 |
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Hint: It is clearer to do two entries, but you can combine into one entry. |
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To re-value A/P (SFr), show work:
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To re-value forward, show work:
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To offset FC TX G/L on hedged item |
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To pay off A/P (SFr), show work:
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To exercise forward, show work: (Hint; Three accounts using my approach; four accounts using the book’s approach)
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Hedged Item |
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3/1/X8 |
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To record sale of inventory
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b. The effect of the foreign currency transactions on the income statement, including both the accounts payable and the forward contract, for the year ended December 31, 20X7
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= $ |
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☐ income ☐ loss ☐ no effect |
Show work or explain:
c. The effect of the foreign currency transactions on the income statement, including both the accounts payable and the forward contract, for the year ended December 31, 20X8
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= $ |
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☐ income ☐ loss ☐ no effect |
Show work or explain:
d. Overall effect of foreign currency transactions on the income statement, including both the accounts payable and the forward contract, for 20X7 and 20X8 combined
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= $ |
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☐ income ☐ loss ☐ no effect |
Show work or explain:
e. The gross profit to be reported in the 20X8 income statement
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= $ |
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Show work or explain: (Note: Gross profit = Net sales – COGS. MUST memorize!)
f. Overall effect of these transactions (foreign currency transactions and gross profit) on net income from 20X7 to 20X8
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= $ |
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☐ income ☐ loss ☐ no effect |
Show work or explain:
( Hint: This answer should be the same as your answer to Question (f) in Part I because, once the earnings process is complete, nothing remains deferred in OCI. All gains and losses should be realized in the income statement.)
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