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International Accounting
Case 2 -- Fall 2020
Part A
Car ID Inc. is a U.S.-based distributor of auto supplies for several domestic and foreign car companies. On November 1, Year 1, Car ID sold and shipped auto parts to a customer in Switzerland for a price of 500,000 Swiss francs (CHF). Payment is to be received on January 30, Year 2. On the date of sale, Car ID also entered into a three-month forward contract to sell CHF 500,000. The forward contract is properly designated as a cash flow hedge of a foreign currency receivable. Car ID’s incremental borrowing rate is 12%. The present value factor for one month at an incremental borrowing rate of 12% is .99010. Relevant exchange rates are as follows:
Spot Forward Rate
Date Rate (to January 30, Year 2)
November 1, Year 1. . . . . . . . . . . . . . $0.500 $0.495
December 31, Year 1. . . . . . . . . . . . . . 0.520 0.516
January 30, Year 2. . . . . . . . . . . . . . . . 0.490 0.490
Required: 50 Points
1. Car ID is required to formally document the hedging transaction at the time the forward contract is entered into. In general, what information is to be included in order to satisfy the hedge documentation requirements?
2. Prepare all necessary journal entries to account for the sale and foreign currency forward contract. Assume that Car ID Inc. closes the books and prepares financial statements on December 31, Year 1.
Where appropriate, round to 2 decimal points.
3. Based upon your work in No. 2 above, what is the impact on net income for each year, and in total, due to the foreign currency aspects of this transaction?
Note:
Submit your work in a Word document or Excel. Where appropriate, show your calculations to ensure partial credit.
This is not a group case. The work submitted must be your own.

Part B
Car ID Inc. placed an order with a company in South Africa to purchase vinyl and related upholstery materials for a total of 5,000,000 South Africa Rand (ZAR). Relevant exchange rates are as follows:
Spot Forward Rate
Date Rate (to April 30, Year 2)
November 1, Year 1. . . . . . . . . . . . . . $0.1200 $0.1202
December 31, Year 1. . . . . . . . . . . . . . 0.1300 0.1301
April 30, Year 2. . . . . . . . . . . . . . . . . . 0.1350 0.1350
Car ID Inc. closes the books and prepares financial statements on December 31, Year 1.

Required: 40 Points
1. Assume the materials were received on November 1, Year 1 and Car ID pays the supplier on April 30, Year 2. On November 1, Car ID Inc. entered into a six-month forward contract to purchase ZAR 5,000,000. The forward contract is properly designated as a fair value hedge of a foreign currency payable. The present value factor for four months at an incremental borrowing rate of 12 percent (1 percent per month) is .96098. Prepare journal entries to account for the purchase and foreign currency forward contract. Where appropriate, round to 2 decimal points.
2. Based upon your work in No. 1 above, what is the impact on net income for each year, and in total, due to the foreign currency aspects of this transaction?
show your calculations to ensure partial credit.
Part C
Required: 10 Points
1. Independent of requirement No.1, assume that Car ID Inc. ordered the materials on November 1, Year 1. They were received and paid for on April 30, Year 2. On November 1, Car ID Inc. entered into a six-month forward contract to purchase ZAR 5,000,000. The forward contract is properly designated as a fair value hedge of a foreign currency firm commitment. Prepare journal entries to account for (a) the foreign currency forward contract, (b) the firm commitment, and (3) the payment.

Note: This type of hedge is demonstrated on pages 259-260 of the text. As a reference, compare these entries to those related to the Fair Value Hedge of a foreign currency payable on pages 256-257. There are no new calculations that you need to make.

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