Assignment: Accounting Journal Entries
Journal Entries (Ricky and Potatoes)
1. Assumes that Ricky Corporation (Ricky) normally sells goods in France and therefore has a stream of income which is denominated in Euros. Ricky enters into a master agreement with a bank to convert this future stream of Euros into US dollars. Determine whether this agreement is considered a derivative under both the US GAAP and under the IFRS. Support your decision with reference(s) to the appropriate literature issued by both standard setters.
2. The Potato Company (Potato) produces frozen French fries and therefore uses potatoes as the major raw material in its manufacturing process. Potato enters a forward exchange contract to purchase 20 bushels of potatoes in 30 days for $1,200. The contract has a net settlement provision.
Part 1: Assume that the potatoes are worth $1,250 at the end of 30 days. Explain in detail how the forward exchange contract might or would be settled in 30 days? What are Potato's options with respect to the forward exchange contract?
Part 2: Assume that potatoes are not easily convertible into cash and that Potato has a history of taking delivery of the potatoes under these types of contracts (gross settlement). Potato has decided NOT to document the instrument as a normal purchase and sales contract. Prepare the journal entries required under both the US GAAP and IFRS separately, with detailed explanations of the basis for each dollar journal entry amount, and a detailed journal entry explanation with appropriate reference(s) to the accounting literature for both standard-setters for each respective journal entry.
Format your assignment according to the following formatting requirements:
1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
3. Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.
Chapter 11 in Advanced Financial Accounting (pp. 573-599)
Ernst & Young Foundation. (2017). Derivatives including Hedging - lecture notes.
Ernst & Young Foundation. (2017). Derivatives including Hedging - PowerPoint.
Ernst & Young Foundation. (2017). Derivatives including Hedging - questions.
Ernst & Young Foundation. (2017). Derivatives including Hedging - solutions.
Rambo, R. G., Main, D., & Beaubien, L. (2011). Reducing reporting risk: Designating foreign currency forward contracts as cash flow hedges. Journal of Accounting Education, 29(4), 284-294.
Campbell, J., Downes, L., & Schwartz, J. (2015). Do sophisticated investors use the information provided by the fair value of cash flow hedges? Review of Accounting Studies, 20(2), 934-975.
KPMG. (2016). IFRS Compared to US GAAP: An overview.