Tutorial 3 answer
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This document provides solutions to tutorial questions involving foreign currency transactions and hedging. Question 1 involves calculating gains and losses on foreign exchange rates. Question 2 demonstrates journal entries for a cash flow hedge and fair value hedge of a foreign currency receivable. Question 3 shows journal entries for a forward contract used as a cash flow hedge of a foreign currency payable. It records the initial purchase, fair value adjustments of the forward contract and payable over time, and settlement of the forward contract.
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![TUTORIAL 3
SOLUTION
SOLUTION FOR Q1
a)
Loss $2,000
(100,000 x (1.87 – 1.85) = 2,000
b)
Asset $950
(100,000 x (1.85 – 1.84) = 1,000
1,000 x 0.95 (present value discount factor) = 950
SOLUTION FOR Q2
a. Forward Contract Cash Flow Hedge of Foreign Currency Receivable
1 December 2012
Accounts receivable (USD) [20,000 x RM3.00] 60,000
Sales 60,000
No entry for the forward contract.
31 December 2012
Accounts receivable (USD) 1,000
Foreign exchange gain 1,000
[20,000 x (RM3.05 – RM3.00)]
Loss on forward contract 1,000
Cash flow hedge reserve 1,000
Cash flow hedge reserve 1,176.36
Forward contract 1,176.36
[20,000 x (RM3.04 – RM3.10) = RM1,200 x .9803 = RM1,176.36]
Cash flow hedge reserve 266.67
Premium revenue 266.67
[20,000 x (RM3.04 – RM3.00) = RM800 x 1/3 = RM266.67]](https://image.slidesharecdn.com/tutorial3answer-150121033155-conversion-gate02/85/Tutorial-3-answer-1-320.jpg)
![1 March 2013
Accounts receivable (USD) 1,400
Foreign exchange gain 1,400
[20,000 x (RM3.12 – RM3.05)]
Loss on forward contract 1,400
Cash flow hedge reserve 1,400
Cash flow hedge reserve 423.64
Forward contract 423.64
[20,000 x (RM3.12 - RM3.04) = RM1,600 – 1,176.36]
Cash flow hedge reserve 533.33
Premium revenue 533.33
[RM800 x 2/3 = RM533.33]
Foreign currency (USD) [20,000 x RM3.12] 62,400
Accounts receivable (USD) 62,400
Cash [20,000 x RM3.04] 60,800
Forward contract 1,600
Foreign currency (USD) 62,400
b. Forward Contract Fair Value Hedge of Foreign Currency Receivable
1 December 2012
Accounts receivable (USD) 60,000
Sales 60,000
[20,000 x RM3.00]
No entry for the forward contract.](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)
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Initial investment = $2,600,000+80,000+120,000+100,000= $2,900,000
Gross profit = sales - cost = 125,000* (40-30) = $1,250,000
Gross profit - net effect on introducing new wine = 1,250,000-20,000 = 1,230,000
Cash flow in year 5 = Profit after tax + depreciation + changes in working capital
= 877,500+ 210,000 + 100,000 = $1,187,500
Year
Cash flows
Depreciation
Profit after depreciation
Tax at 25%
Profit after tax
Cash flows
Discounting factor at 10%
PV of cash flows
cumulative cash flows
0
(2,900,000)
-
(2,900,000)
1
(2,900,000)
(2,900,000)
1
1,230,000
(990,000)
240,000
60,000
180,000
1,170,000
0.909091
1,063,636.36
(1,836,363.64)
2
1,230,000
(1,350,000)
(120,000)
-
(120,000)
1,230,000
0.826446
1,016,528.93
(819,834.71)
3
1,230,000
(450,000)
780,000
195,000
585,000
1,035,000
0.751315
777,610.82
(42,223.89)
4
1,380,000
(210,000)
1,170,000
292,500
877,500
1,187,500
0.683013
811,078.48
768,854.59
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768,855
IRR
22%
MIRR
17%
Payback period
3.05
Years
Yes, the project should be under taken because the NPV is positive and IRR and MIRR are more
than the cost of capital.
Year
Cash flows
Depreciation
Profit after depreciation
Tax at 25%
Profit after tax
Cash flows
Discounting factor at 10%
PV of cash flows
cumulative cash flows
0
(2,900,000)
-
(2,900,000)
1
(2,900,000)
(2,900,000)
1
1,230,000
(990,000)
240,000
60,000
180,000
1,170,000
0.909091
1,063,636.36
(1,836,363.64)
2
1,230,000
(1,350,000)
(120,000)
-
(120,000)
1,230,000
0.826446
1,016,528.93
(819,834.71)
3
1,230,000
(450,000)
780,000
195,000
585,000
1,035,000
0.751315
777,610.82
(42,223.89)
4
1,380,000
(210,000)
1,170,000
292,500
877,500
1,187,500
0.683013
811,078.48
768,854.59
NPV
768,855
IRR
22%
MIRR
17%
Payback period
3.05
Years
Solution
Initial investment = $2,600,000+80,000+120,000+100,000= $2,900,000
Gross profit = sales - cost = 125,000* (40-30) = $1,250,000
Gross profit - net effect on introducing new wine = 1,250,000-20,000 = 1,230,000
Cash flow in year 5 = Profit after tax + depreciation + changes in working capital
= 877,500+ 210,000 + 100,000 = $1,187,500
Year
Cash flows
Depreciation
Profit after depreciation
Tax at 25%
Profit after tax
Cash flows
Discounting factor at 10%
PV of cash flows
cumulative cash flows
0
(2,900,000)
-
(2,900,000)
1
(2,900,000)
(2,900,000)
1
1,230,000
(990,000)
240,000
60,000
180,000
1,170,000
0.909091
1,063,636.36
(1,836,363.64)
2
1,230,000
(1,350,000)
(120,000)
-
(120,000)
1,230,000
0.826446
1,016,528.93
(819,834.71)
3
1,230,000
(450,000)
780,000
195,000
585,000
1,035,000
0.751315
777,610.82
(42,223.89)
4
1,380,000
(210,000)
1,170,000
292,500
877,500
1,187,500
0.683013
811,078.48
768,854.59
NPV
768,855
IRR
22%
MIRR
17%
Payback period
3.05
Years
Yes, the project should be under taken because the NPV is positive and IRR and MIRR are more
than the cost of capital.
Year
Cash flows
Depreciation
Profit after depreciation
Tax at 25%
Profit after tax
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Discounting factor at 10%
PV of cash flows
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(2,900,000)
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(2,900,000)
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Initial investment = $2,600,000+80,000+120,000+100,000= $2,900,000
Gross profit = sales - cost = 125,000* (40-30) = $1,250,000
Gross profit - net effect on introducing new wine = 1,250,000-20,000 = 1,230,000
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Year
Cash flows
Depreciation
Profit after depreciation
Tax at 25%
Profit after tax
Cash flows
Discounting factor at 10%
PV of cash flows
cumulative cash flows
0
(2,900,000)
-
(2,900,000)
1
(2,900,000)
(2,900,000)
1
1,230,000
(990,000)
240,000
60,000
180,000
1,170,000
0.909091
1,063,636.36
(1,836,363.64)
2
1,230,000
(1,350,000)
(120,000)
-
(120,000)
1,230,000
0.826446
1,016,528.93
(819,834.71)
3
1,230,000
(450,000)
780,000
195,000
585,000
1,035,000
0.751315
777,610.82
(42,223.89)
4
1,380,000
(210,000)
1,170,000
292,500
877,500
1,187,500
0.683013
811,078.48
768,854.59
NPV
768,855
IRR
22%
MIRR
17%
Payback period
3.05
Years
Yes, the project should be under taken because the NPV is positive and IRR and MIRR are more
than the cost of capital.
Year
Cash flows
Depreciation
Profit after depreciation
Tax at 25%
Profit after tax
Cash flows
Discounting factor at 10%
PV of cash flows
cumulative cash flows
0
(2,900,000)
-
(2,900,000)
1
(2,900,000)
(2,900,000)
1
1,230,000
(990,000)
240,000
60,000
180,000
1,170,000
0.909091
1,063,636.36
(1,836,363.64)
2
1,230,000
(1,350,000)
(120,000)
-
(120,000)
1,230,000
0.826446
1,016,528.93
(819,834.71)
3
1,230,000
(450,000)
780,000
195,000
585,000
1,035,000
0.751315
777,610.82
(42,223.89)
4
1,380,000
(210,000)
1,170,000
292,500
877,500
1,187,500
0.683013
811,078.48
768,854.59
NPV
768,855
IRR
22%
MIRR
17%
Payback period
3.05
Years
Solution
Initial investment = $2,600,000+80,000+120,000+100,000= $2,900,000
Gross profit = sales - cost = 125,000* (40-30) = $1,250,000
Gross profit - net effect on introducing new wine = 1,250,000-20,000 = 1,230,000
Cash flow in year 5 = Profit after tax + depreciation + changes in working capital
= 877,500+ 210,000 + 100,000 = $1,187,500
Year
Cash flows
Depreciation
Profit after depreciation
Tax at 25%
Profit after tax
Cash flows
Discounting factor at 10%
PV of cash flows
cumulative cash flows
0
(2,900,000)
-
(2,900,000)
1
(2,900,000)
(2,900,000)
1
1,230,000
(990,000)
240,000
60,000
180,000
1,170,000
0.909091
1,063,636.36
(1,836,363.64)
2
1,230,000
(1,350,000)
(120,000)
-
(120,000)
1,230,000
0.826446
1,016,528.93
(819,834.71)
3
1,230,000
(450,000)
780,000
195,000
585,000
1,035,000
0.751315
777,610.82
(42,223.89)
4
1,380,000
(210,000)
1,170,000
292,500
877,500
1,187,500
0.683013
811,078.48
768,854.59
NPV
768,855
IRR
22%
MIRR
17%
Payback period
3.05
Years
Yes, the project should be under taken because the NPV is positive and IRR and MIRR are more
than the cost of capital.
Year
Cash flows
Depreciation
Profit after depreciation
Tax at 25%
Profit after tax
Cash flows
Discounting factor at 10%
PV of cash flows
cumulative cash flows
0
(2,900,000)
-
(2,900,000)
1
(2,900,000.
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Buying
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This document contains solutions to problems related to leverage and capital structure.
Some key points summarized:
1) Breakeven analysis is performed for multiple companies using algebraic formulas to calculate the quantity needed to break even. Comparisons are made between companies' operating leverage.
2) Graphs are used to show the relationship between sales, costs, profits and losses at different production levels as well as to illustrate how degree of operating leverage decreases as production increases past the breakeven point.
3) Calculations are shown for earnings per share under different financing plans and levels of earnings before interest and taxes to demonstrate how degree of financial leverage is affected.
4) Integrated examples bring together concepts of operating
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1) It provides calculations of breakeven points, degrees of operating leverage, earnings per share, and degrees of financial leverage for various companies.
2) It demonstrates how changes in sales, costs, prices, and financial structure impact measures of leverage and risk.
3) Integrative problems bring together multiple leverage concepts to analyze overall business risk for different firms.
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For question 1, basic EPS is calculated as net income divided by weighted average shares outstanding.
Question 2 involves more steps to calculate basic and diluted EPS, accounting for additional shares from options, convertible bonds, and convertible preference shares. Diluted EPS is calculated by ranking the incremental EPS from each potential ordinary share instrument and accumulating the increases.
Question 3 also involves multiple steps to calculate basic and diluted EPS, considering ordinary shares, convertible preference shares, options, and convertible bonds. Diluted EPS is determined by accumulating the increases in earnings and shares from each instrument.
Bussiness accounting assignment#2
Company 1: In 2013, Coolgardie's return on assets decreased to 15.42% from 23.78% in 2012 due to a drop in profit and increased assets. The net profit margin also decreased from 19.83% to 13.92% as expenses increased more than revenue.
Company 2: In 2010, Billie's Bakery had higher liquidity and profitability ratios compared to 2009. The debt to equity ratio was lower in 2010 at 0.39 compared to 0.41 in 2009.
NSW Ltd and QLD Ltd: In the current year, NSW Ltd had higher returns and shorter days for inventory and debtors compared to QLD Ltd, while their current and liquid
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Accounting 970602 paper 2 core topics for examination from 2010 specimen mark...
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233665105 eng-g-economy
1. The gold mine is expected to be exhausted within 20 years. With annual costs of $750,000 and $120/ton, it earns $450/ton and has annual output of 25,000 tons. The property valuation is $53,745,535.
2. The timber land was bought for $8,000,000 and sold for $200,000 after 14 years of $1,400,000 average annual profits. The investment rate is 13.2%.
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Tutorial 3 answer
- 1. TUTORIAL 3 SOLUTION SOLUTION FOR Q1 a) Loss $2,000 (100,000 x (1.87 – 1.85) = 2,000 b) Asset $950 (100,000 x (1.85 – 1.84) = 1,000 1,000 x 0.95 (present value discount factor) = 950 SOLUTION FOR Q2 a. Forward Contract Cash Flow Hedge of Foreign Currency Receivable 1 December 2012 Accounts receivable (USD) [20,000 x RM3.00] 60,000 Sales 60,000 No entry for the forward contract. 31 December 2012 Accounts receivable (USD) 1,000 Foreign exchange gain 1,000 [20,000 x (RM3.05 – RM3.00)] Loss on forward contract 1,000 Cash flow hedge reserve 1,000 Cash flow hedge reserve 1,176.36 Forward contract 1,176.36 [20,000 x (RM3.04 – RM3.10) = RM1,200 x .9803 = RM1,176.36] Cash flow hedge reserve 266.67 Premium revenue 266.67 [20,000 x (RM3.04 – RM3.00) = RM800 x 1/3 = RM266.67]
- 2. 1 March 2013 Accounts receivable (USD) 1,400 Foreign exchange gain 1,400 [20,000 x (RM3.12 – RM3.05)] Loss on forward contract 1,400 Cash flow hedge reserve 1,400 Cash flow hedge reserve 423.64 Forward contract 423.64 [20,000 x (RM3.12 - RM3.04) = RM1,600 – 1,176.36] Cash flow hedge reserve 533.33 Premium revenue 533.33 [RM800 x 2/3 = RM533.33] Foreign currency (USD) [20,000 x RM3.12] 62,400 Accounts receivable (USD) 62,400 Cash [20,000 x RM3.04] 60,800 Forward contract 1,600 Foreign currency (USD) 62,400 b. Forward Contract Fair Value Hedge of Foreign Currency Receivable 1 December 2012 Accounts receivable (USD) 60,000 Sales 60,000 [20,000 x RM3.00] No entry for the forward contract.
- 3. 31 December 2012 Accounts receivable (USD) 1,000 Foreign exchange gain 1,000 [20,000 x (RM3.05 – RM3.00)] Loss on forward contract 1,176.36 Forward contract 1,176.36 [20,000 x (RM3.04 – RM3.10) = RM1,200 x .9803 = RM1,176.36] 1 March 2013 Accounts receivable (USD) 1,400 Foreign exchange gain 1,400 [20,000 x (RM3.12 – RM3.05)] Loss on forward contract 423.64 Forward contract 423.64 [20,000 x (RM3.12 – RM3.04) = RM1,600 – 1,176.36] Foreign currency (USD) 62,400 Accounts receivable (USD) 62,400 [20,000 x RM3.12] Cash [20,000 x RM3.04] 60,800 Forward contract 1,600 Foreign currency (USD) 62,400
- 4. SOLUTION FOR Q3 a) 1 November 2013: Materials 300,000 Accounts Payable (USD) 300,000 (To record purchase: USD100,000 x RM3.00) 31 December 2013 Foreign exchange loss 900 Accounts payable (USD) 900 [To adjust the value of accounts payable to the new spot rate: 100,000 x (RM3.009 – RM3.00)] Forward contract 990 Cash flow hedge reserve 990 [To record the forward contract as an asset at its fair value: 100,000 x (RM2.995 – RM2.985) = RM1,000 x .990 (PVFn=1/i=1%) = RM990] Cash flow hedge reserve 900 Gain on forward contract 900 (To record a gain on forward contract to offset the foreign exchange loss on accounts payable) Cash flow hedge reserve 1,000 Discount revenue 1,000 [To allocate the forward contract discount to net income using straight-line method: 100,000 x (RM3.00 – RM2.985) = RM1,500 x 2/3 = RM1,000] 31 January 2014 Accounts payable (USD) 2,900 Foreign exchange gain 2,900 [To adjust the value of accounts payable to the new spot rate: 100,000 x (RM3.009 – RM2.980)] Cash flow hedge reserve 1,490 Forward contract 1,490
- 5. [To adjust the carrying value of the forward contract to its current fair value: 100,000 x (RM2.985 – RM2.980) = RM500 + RM990] Cash flow hedge reserve 500 Discount revenue 500 [To allocate the forward contract discount to net income: RM1,500 x 1/3 = RM500] Loss on forward contract 2,900 Cash flow hedge reserve 2,900 (To record a loss on forward contract to offset the foreign exchange gain on accounts payable) Foreign currency (USD) [100,000 x RM2.980] 298,000 Forward contract 500 Cash [100,000 x RM2.985] 298,500 Accounts payable (USD) 298,000 Foreign currency (USD) 298,000 b) Fair value hedge: On reporting date, the hedge asset or liability is reported at fair value. Change in fair value is recognized through profit or loss. The derivative hedging instrument is adjusted to fair value (resulting in an asset or liability reported on the balance sheet), with the counterpart recognized as a gain or loss in net income. The discount or premium on a forward contract is not allocated to net income.