Question
In: Accounting
Honey Ltd, a New Zealand company, has sold US$150,000 of products to the US, to receive...
Honey Ltd, a New Zealand company, has sold US$150,000 of products to the US, to receive cash exactly one month later. At the time of sale, the spot rate of exchange is US$0.55, that is, NZ$1 buys US$0.55. Honey Ltd wishes to hedge the currency risk associated with this transaction, so on the day of the sale, the company buys a put option – that is, it buys the right to sell US$150,000 at an exercise price of US$0.57 one month later. The option costs $3,000 in cash. The relevant information is shown in the table below:
| spot rate | Option value | |
| At the date of sale | 0.55 | $3,000 |
| One month late (i.e., at settlement) | 0.62 |
Required:
(i) In accordance with NZ IFRS 9, show the journal entry to record the sale and any additional journal entries that are required through to (and including) settlement.
(ii) What is the most that Honey Ltd can lose overall in this hedging activity (regardless of what the exchange rate is at settlement date)? Show all workings.
Solutions
ekkarill92 answered 9 months agoRelated Solutions
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otorua Products, Ltd., of New Zealand markets agricultural
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Year 1
Year 2
Year 3
Year 4
Year 5
Sales
$
1,800,000
$
1,980,000
$
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$
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$
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Cash
$
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$
65,000
$
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$
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Accounts receivable, net
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345,000
405,000
510,000
570,000
Inventory
600,000...
Rotorua Products, Ltd., of New Zealand markets agricultural products for the burgeoning Asian consumer market. The...
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years (Year 5 is the most recent year) are as follows:
Year 1
Year 2
Year 3
Year 4
Year 5
Sales
$
4,601,270
$
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$
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$
5,510,220
$
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Cash
$
88,540
$
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$
94,214
$
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$
77,351
Accounts receivable, net
418,193
419,393
437,761
515,351
576,719
Inventory
801,902...
Rotorua Products, Ltd., of New Zealand markets agricultural products for the burgeoning Asian consumer market. The...
Rotorua Products, Ltd., of New Zealand markets agricultural
products for the burgeoning Asian consumer market. The company’s
current assets, current liabilities, and sales over the last five
years (Year 5 is the most recent year) are as follows: Year 1 Year
2 Year 3 Year 4 Year 5 Sales $ 4,519,650 $ 4,743,420 $ 4,986,130 $
5,404,630 $ 5,644,150 Cash $ 83,903 $ 94,914 $ 91,997 $ 79,973 $
72,599 Accounts receivable, net 403,668 425,131 432,904 506,860
563,814 Inventory 818,643...
Rotorua Products, Ltd., of New Zealand markets agricultural products for the burgeoning Asian consumer market. The...
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products for the burgeoning Asian consumer market. The company’s
current assets, current liabilities, and sales over the last five
years (Year 5 is the most recent year) are as follows:
Year 1
Year 2
Year 3
Year 4
Year 5
Sales
$
4,504,310
$
4,838,440
$
5,003,570
$
5,532,780
$
5,644,610
Cash
$
87,574
$
96,953
$
86,589
$
88,508
$
80,997
Accounts receivable, net
418,154
435,330
443,074
510,098
562,711
Inventory
815,081...
Rotorua Products, Ltd., of New Zealand markets agricultural products for the burgeoning Asian consumer market. The...
Rotorua Products, Ltd., of New Zealand markets agricultural
products for the burgeoning Asian consumer market. The company’s
current assets, current liabilities, and sales over the last five
years (Year 5 is the most recent year) are as follows: Year 1 Year
2 Year 3 Year 4 Year 5 Sales $ 4,500,090 $ 4,903,310 $ 5,148,110 $
5,529,910 $ 5,632,260 Cash $ 88,312 $ 103,640 $ 102,980 $ 86,199 $
83,505 Accounts receivable, net 404,988 431,050 442,486 500,081
567,716 Inventory 804,331...
Rotorua Products, Ltd., of New Zealand markets agricultural products for the burgeoning Asian consumer market. The...
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products for the burgeoning Asian consumer market. The company’s
current assets, current liabilities, and sales over the last five
years (Year 5 is the most recent year) are as follows: Year 1 Year
2 Year 3 Year 4 Year 5 Sales $ 4,500,090 $ 4,903,310 $ 5,148,110 $
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83,505 Accounts receivable, net 404,988 431,050 442,486 500,081
567,716 Inventory 804,331...
Rotorua Products, Ltd., of New Zealand markets agricultural products for the burgeoning Asian consumer market. The...
Rotorua Products, Ltd., of New Zealand markets agricultural
products for the burgeoning Asian consumer market. The company’s
current assets, current liabilities, and sales have been reported
as follows over the last five years (Year 5 is the most recent
year):
Year 1
Year 2
Year 3
Year 4
Year 5
Sales
$
4,515,380
$
4,822,420
$
5,076,200
$
5,452,070
$
5,729,200
Cash
$
86,992
$
95,104
$
103,580
$
80,327
$
75,778
Accounts receivable, net...
Rotorua Products, Ltd., of New Zealand markets agricultural products for the burgeoning Asian consumer market. The...
Rotorua Products, Ltd., of New Zealand markets agricultural
products for the burgeoning Asian consumer market. The company’s
current assets, current liabilities, and sales over the last five
years (Year 5 is the most recent year) are as follows:
Year 1
Year 2
Year 3
Year 4
Year 5
Sales
$
4,538,620
$
4,810,420
$
5,059,140
$
5,531,590
$
5,664,970
Cash
$
86,561
$
90,131
$
89,470
$
75,324
$
77,867
Accounts
receivable, net
404,243
422,030
432,018
511,505
573,091
Inventory
818,757...
Rotorua Products, Ltd., of New Zealand markets agricultural products for the burgeoning Asian consumer market. The...
Rotorua Products, Ltd., of New Zealand markets agricultural
products for the burgeoning Asian consumer market. The company’s
current assets, current liabilities, and sales over the last five
years (Year 5 is the most recent year) are as follows:
Year 1
Year 2
Year 3
Year 4
Year 5
Sales
$
4,509,210
$
4,902,100
$
4,979,250
$
5,457,960
$
5,801,230
Cash
$
92,620
$
92,634
$
94,024
$
72,295
$
72,696
Accounts receivable, net
400,363
425,222
449,526
498,920
563,527
Inventory
817,045...
Q. Rotorua Products, Ltd., of New Zealand markets agricultural products for the burgeoning Asian consumer market....
Q. Rotorua Products, Ltd., of New Zealand markets agricultural
products for the burgeoning Asian consumer market. The company’s
current assets, current liabilities, and sales over the last five
years (Year 5 is the most recent year) are as follows:
Year 1
Year 2
Year 3
Year 4
Year 5
Sales
$
4,552,550
$
4,916,940
$
5,080,520
$
5,495,400
$
5,744,250
Cash
$
91,127
$
103,071
$
93,808
$
88,914
$
77,726
Accounts receivable, net
400,089
424,346
439,101
501,251
561,062
Inventory...
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