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Problem 5.1 Name ______Solution______

The Lowell Corporation sells merchandise to two clients. One client is in the United States and one is in Chile. The Lowell Corporation's transactions with the US client are negotiated in US dollars and the transactions with the Chilean client are negotiated in Chilean reals (CR). The Lowell Corporation maintains its accounting records in US dollars and prepares monthly financial statements. From April through July, the relationships between US dollars and Chilean reals were as follows.

Date / US dollars / Chilean reals
April 1 / 1,000 / 499,251
April 16 / 1,000 / 499,501
April 30 / 1,000 / 499,750
May 16 / 1,000 / 499,750
May 31 / 1,000 / 500,250
June 30 / 1,000 / 500,501
July 15 / 1,000 / 501,002
July 31 / 1,000 / 501,253

On April 16 the Lowell Corporation shipped products to the Chilean client and charged 30,000,000 CR to be received by July 15. On May 16 the Lowell Corporation purchased a forward contract to deliver 20,000,000 CR to the Chilean Bank on July 15 in return for $39,940. Forward rates for Chilean reals were as follows: May 16 = .001997, May 31 = .001996, June 30 = .001995, and July 15 = .001996. Due to the small dollar amount and short life of the forward contract, assume all relevant present value factors are 1.00. On July 15 the Lowell Corporation received full payment from the client and completed all transactions related to the forward contract.

1.  Use the following table to calculate the exchange rates used to convert Chilean reals to US dollars.

Date / Exchange Rate
(6 decimal places)
April 1 / .002003
April 16 / .002002
April 30 / .002001
May 16 / .002001
May 31 / .001999
June 30 / .001998
July 15 / .001996
July 31 / .001995


2. In chronological order, prepare journal entries to record the Lowell Corporation's April 16 through July 15 transactions. Monthly closing entries should not be prepared. Round all amounts to the nearest $1.

Date / Accounts / Debits / Credits
April 16 / Accounts Receivable (CR) / 60,060
Sales / 60,060
Chilean sales
April 30 / Foreign Exchange Loss / 30
Accounts Receivable (CR) / 30
30,000,000 CR x (.002002 - .002001)
May 31 / Foreign Exchange Loss / 60
Accounts Receivable (CR) / 60
30,000,000 CR x (.002001 - .001999)
May 31 / Forward Contract / 20
Gain on Forward Contract / 20
$20,000,000 x (.001997 - .001996)
June 30 / Foreign Exchange Loss / 30
Accounts Receivable (CR) / 30
30,000,000 CR x (.001999 - .001998)
June 30 / Forward Contract / 20
Gain on Forward Contract / 20
$20,000,000 x (.001996 - .001995)
July 15 / Foreign Exchange Loss / 60
Accounts Receivable (CR) / 60
30,000,000 CR x (.001998 - .001996)
July 15 / Loss on Forward Contract / 20
Forward Contract / 20
$20,000,000 x (.001995 - .001996)
July 15 / Foreign Currency / 59,880
Accounts Receivable (CR) / 59,880
Collection of Chilean receivable
Date / Accounts / Debits / Credits
July 15 / Cash / 39,940
Foreign Currency / 39,920
Forward Contract / 20
Settlement of forward contract

3. Calculate the Lowell Corporation's income effects from all transactions related to its Chilean client and forward contract.

Item / April / May / June / July / Totals
Sales / $60,060 / $60,060
Foreign exchange loss / ($30) / ($60) / ($30) / ($60) / ($180)
Gain or (loss) on forward contract / $20 / $20 / ($20) / $20
Totals / $60,030 / ($40) / ($10) / ($80) / $59,900

4. Assume the Lowell Corporation did not engage in the forward contract. Calculate the Lowell Corporation's income effects from all transactions related to its Chilean client.

Item / April / May / June / July / Totals
Sales / $60,060 / $60,060
Foreign exchange loss / ($30) / ($60) / ($30) / ($60) / ($180)
Totals / $60,030 / ($60) / ($30) / ($60) / $59,880