Part Two: This 11:59 pm. David provided details around the company's largest US sale in the...

Transcribed Image Text:

Part Two: This 11:59 pm. David provided details around the company's largest US sale in the year and the relevant exchange rates (Exhibit III). He also noted that they had considered using a forward contract but ultimately chose not to. After a bit of research, you determined that the following rates were applicable to a forward contract to sell $1,250,000 U.S. settling on December 15, 2023: Date April 1 November 1 Forward contract rate 1.295 1.28 Prepare a memo for the Beckhams that discusses ways the company could manage the risk associated with foreign currency denominated transactions in the future. Include with your memo a comparison of the effect on ESE's net income of the U.S. sale transaction as it was recorded to the effect had the company entered into a forward contract on April 1 to sell $1,250,000 USD on December 15. Include in your discussion, a brief comparison of the income effect of designating or not designating the forward contract as a hedge of the sale Exhibit III Foreign Transaction Prepared by David Beckham In 2023, SSM had a large order from a U.S. client which resulted in a foreign exchange loss. We had considered entering into a forward currency contract but we were not confident that we knew what we were doing and so opted not to use one. We are wondering if that was a mistake on our part. We anticipate that our U.S. sales will increase considerably over the next few years. Our goal is to have consistent sales in the U.S. by 2026 but for now we expect to continue to have sporadic sales over the next few years as we build our reputation in the United States. I am concerned with the loss we experienced on the foreign exchange and hope you can provide us with some advice on how we can manage the risk both now and when the U.S. sales become more consistent. SSM does not have a U.S. denominated bank account so all foreign source cash is converted to Canadian dollars immediately. Here is some information related to the sale that occurred in 2023: Exchange Date Sales order received April 1 USD $ $1,500,000 rate 1.34 CDN $ $2,010,000 Deposit received April 1 $250,000 1.34 335,000 Product delivered November 1 $1,500,000 1.30 1,950,000 Balance of payment received December 15 $1,250,000 1.27 1,587,500 Part Two: This 11:59 pm. David provided details around the company's largest US sale in the year and the relevant exchange rates (Exhibit III). He also noted that they had considered using a forward contract but ultimately chose not to. After a bit of research, you determined that the following rates were applicable to a forward contract to sell $1,250,000 U.S. settling on December 15, 2023: Date April 1 November 1 Forward contract rate 1.295 1.28 Prepare a memo for the Beckhams that discusses ways the company could manage the risk associated with foreign currency denominated transactions in the future. Include with your memo a comparison of the effect on ESE's net income of the U.S. sale transaction as it was recorded to the effect had the company entered into a forward contract on April 1 to sell $1,250,000 USD on December 15. Include in your discussion, a brief comparison of the income effect of designating or not designating the forward contract as a hedge of the sale Exhibit III Foreign Transaction Prepared by David Beckham In 2023, SSM had a large order from a U.S. client which resulted in a foreign exchange loss. We had considered entering into a forward currency contract but we were not confident that we knew what we were doing and so opted not to use one. We are wondering if that was a mistake on our part. We anticipate that our U.S. sales will increase considerably over the next few years. Our goal is to have consistent sales in the U.S. by 2026 but for now we expect to continue to have sporadic sales over the next few years as we build our reputation in the United States. I am concerned with the loss we experienced on the foreign exchange and hope you can provide us with some advice on how we can manage the risk both now and when the U.S. sales become more consistent. SSM does not have a U.S. denominated bank account so all foreign source cash is converted to Canadian dollars immediately. Here is some information related to the sale that occurred in 2023: Exchange Date Sales order received April 1 USD $ $1,500,000 rate 1.34 CDN $ $2,010,000 Deposit received April 1 $250,000 1.34 335,000 Product delivered November 1 $1,500,000 1.30 1,950,000 Balance of payment received December 15 $1,250,000 1.27 1,587,500