Fox Games is a U.S. company that manufacturers computer game consoles. Many of the components for the consoles are purchased abroad, and the finished product is sold in foreign countries as well as in the United States. Among the recent transactions of Fox are the following:
Oct. 25 Purchased from Sutaki, a Japanese company, 15,000 parts. The purchase price was ¥120,000,000, payable in 30 days. Current exchange rate, $0.01 per yen. (Fox uses the perpetual inventory method; debit the Inventory of Raw Materials account.)
Nov. 15 Sold 500 consoles to British Vibes for £200,000, due in 30 days. The cost of the consoles, to be debited to the Cost of Goods Sold account, was $160,000. Current exchange rate, $1.60 per British pound. (Use one compound journal entry to record the sale and the cost of goods sold. In recording the cost of goods sold, credit Inventory of Finished Goods.)
Nov. 24 Issued a check to Inland Bank for $1,150,000 in full payment of account payable to Sutaki.
Dec. 4 Purchased 5,000 black cases from Swiss Plastics for SFr80,000, payable in 60 days. Current exchange rate, $0.70 per Swiss franc. (Debit Inventory of Raw Materials.)
Dec. 15 Collected dollar-equivalent of £200,000 from British Vibes. Current exchange rate, $1.55 per British pound.
Dec. 21 Sold 6,000 game consoles to Sounds, a Norwegian retail chain, for NOK40,000,000, due in 30 days. Current exchange rate, $0.20 per Norwegian krone. The cost of the consoles, to be debited to Cost of Goods Sold and credited to Inventory of Finished Goods, is $5,000,000.
a. Prepare in general journal form the entries necessary to record the preceding transactions.
b. Prepare the adjusted entries needed at December 31 for the SFr80,000 account payable to Swiss Plastics and the NOK40,000,000 account receivable from Sounds. Year-end exchange rates, $0.68 per Swiss franc and $0.18 per Norwegian krone. (Use a separate journal entry to adjust each account balance.)
c. Compute (to the nearest dollar) the unit sales price of consoles in U.S. dollars in both the November 15 and the December 21 sales transaction. (The sales price may not be the same in each transaction.)
d. Compute the exchange rate for the yen, stated in U.S. dollars, on November 24.
e. Explain how Fox Games could have hedged its position to reduce the risk of loss from exchange rate fluctuations on
(1) Its foreign payables and
(2) Its foreign receivables.