Response to the following problem:
DFLL Company is a US manufacturer and seller of personal electronic devices. On November 20, 2017, the company made a sale and delivered 1,000 laptop computers to CostInc SA, a Germany wholesaler for €500,000 (euros) to be paid on February 1, 2018. The (real-world) exchange rates at various dates between US dollar and euro are provided in the table below.
Instruction (round up all answers to 1 decimal points):
a) Record the sale journal entry (ignore the cost of goods entry) for DFLL Company on Nov 20. 2017.
b) Suppose DFLL Company adopts an accounting system that records adjusting entries at year-end, provide the adjusting entry (if necessary) about the Nov 20 sale on Dec 31, 2017.
c) Under the same assumption of part b) and assume that DFLL Company exchanges euros from the Nov 20 sale into US dollars immediately after the collection, provide the journal entry for DFLL Company for the cash collection on Feb 1, 2018.
d) What is the general trend during the time for USD-EUR exchange rate (e.g., does euro in general appreciate or depreciate when comparing to the US dollar)? Suppose DFLL Company has an opportunity to sign a forward contract on Nov 20, 2017 to lock in the exchange rate on Feb 1, 2018 at 1 USD = 0.851 EUR, should the company consider this contract?
(Tip: no standard answer, please provide your thoughts and rational briefly.)
e) With part d) in mind, suppose DFLL Company has an opportunity to purchase (with $1,000) a put option on Nov 20, 2017 to sell €500,000 at a fixed exchange rate on Feb 1, 2018 at 1 USD = 0.851 EUR, should the company consider this option?
(Tip: no standard answer, please provide your thoughts and rational briefly.)
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Date
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Exchange Spot Rate
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Nov 20, 2017
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1 USD = 0.852 EUR
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Dec 31, 2017
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1 USD = 0.833 EUR
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Feb 1, 2018
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1 USD = 0.799 EUR
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Mar 1, 2018
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1 USD = 0.815 EUR
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Apr 1, 2018
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1 USD = 0.812 EUR
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May 1, 2018
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1 USD = 0.834 EUR
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Jun 1, 2018
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1 USD = 0.858 EUR
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