Computation of Exchange Gain or Loss Wheelstick Corporation, incorporated in the state of Delaware, is active in the import/export business. An analysis of Wheelstick's receivables, payables, and other assets (liabilities) prior to adjustment at December 31, 2012, disclosed the following:
Receivables
U.S. customers$ 100,000
Belgian customers (300,000 euros)428,200
Indian customers (1,200,008 rupees)23,950
Saudi Arabian customers (90,000 riyal)24,000
Total receivables$ 576,150
Payables
U.S. suppliers$ (60,000)
Japanese suppliers (1,000,000 yen)(12,000)
Mexican suppliers (500,000 pesos)(39,550)
Total payables$(111,550)
Other current assets (liabilities)
Investment in forward purchase contract (for delivery of
500,000 pesos in 30 days at $0.0816)$ (1,125)
Investment in forward sale contract (for delivery of
300,000 euros in 60 days at $1.40)(10,000)
Total other current assets (liabilities)$ (11,125)
Relevant exchange rates ($/FC) for the above currencies at December 31, 2012, are: Currency
Euro (spot rate)$1.43800
Euro (60-day forward rate)1.44400
Rupee (spot rate)0.02350
Riyal (spot rate)0.26660
Yen (spot rate)0.01303
Mexican peso (spot rate)0.08140
Mexican peso (30-day forward rate)0.08165
Required
a. Prepare a schedule to compute the exchange gain or loss recognized by Wheelstick in 2012. Record the needed adjusting entries.
b. Comment on the hedge effectiveness of the two forward contracts.