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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

CHAPTER 11

MULTINATIONAL ACCOUNTING: FOREIGN CURRENCY TRANSACTIONS AND

FINANCIAL INSTRUMENTS

ANSWERS TO QUESTIONS

Q11-1 Indirect and direct exchange rates differ by which currency is desired to be
expressed in another currency. An indirect exchange rate is the number of foreign
currency units that may be obtained for one local currency unit. The indirect exchange
rate has the foreign currency unit in the numerator. As a fraction, the indirect exchange
rate is expressed as follows:

Number of foreign currency units

One local currency unit

A direct exchange rate is the number of local currency units needed to acquire one
foreign currency unit. The direct exchange rate has the local currency units in the
numerator (the U.S. dollar for the direct exchange rate for the U.S. dollar). As a fraction,
the direct exchange rate is expressed as follows:

Number of local currency units

One foreign currency unit

The indirect and direct exchange rates are inversely related and both state the same
relationship between two currencies.

Q11-2 The direct exchange rate can be calculated by taking the inverse of the indirect
exchange rate. Such a computation follows:

Number of foreign currency units C$1.3623 (Canadian dollars)

=
One local currency unit $1.00 (U.S. dollars)

The inverse of the indirect exchange rate is:

$1.00 (U.S. dollars)

=
C$1.36 (Canadian dollars) $0.7340

Q11-3 When the U.S. dollar strengthens against the European euro, imports from
Europe into the U.S. will be less expensive in U.S. dollars. The direct exchange rate
decreases, indicating that it takes fewer dollars to acquire European euros.

Q11-4 A foreign transaction is a transaction that does not involve the exchange of
currencies on the part of the reporting entity. An example of a foreign transaction is the
sale of equipment by a U.S. company (the reporting entity) to a Japanese firm that is
denominated in U.S. dollars.

A foreign currency transaction is a transaction that does involve the exchange of

currencies on the part of the reporting entity. An example of a foreign currency
transaction is the sale of equipment by a U.S. company (the reporting entity) to a
Japanese firm that is denominated in Japanese yen.

11-1
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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Q11-5 There are many types of economic factors that affect currency exchange rates,
among which are the level of inflation, the balance of payments, changes in interest
rates and investment levels, and the stability and process of governance. One example
of an economic factor that results in a weakening of the U.S. dollar versus the European
euro is a higher level of inflation in the U.S. relative to the inflation in Europe.

Q11-6 Assets and liabilities denominated in a foreign currency are measured according
to the requirements in ASC 830 for those arising from normal purchase and sale
transactions, and by ASC 815 for forward exchange contracts and hedging activities.
ASC 830 specifies that the valuation at the transaction date and each subsequent
balance sheet date should be at the local currency equivalent using the spot rate of
exchange. Forward exchange contracts are valued at fair value, typically by using the
forward rate for the remainder of the term of the forward contract.

Q11-7 Foreign currency transaction gains or losses are recognized in the financial
statements in the period in which the exchange rate changes. These gains or losses are
reported on the income statement.

Q11-8 If the direct exchange rate increases, the Sun Company will experience a
foreign currency transaction loss on its $200,000 account payable that is denominated in
Canadian dollars. The increase in the direct exchange rate shows that the U.S. dollar
has weakened relative to the Canadian dollar, requiring more U.S. dollars be used to
pay the debt owed.

Q11-9 Four ways a U.S. company can manage the risk of changes in the exchange
rates for foreign currencies are to (1) use a forward contract to offset an exposed foreign
currency position, (2) hedge a firm foreign currency commitment as a fair value hedge,
(3) hedge an anticipated foreign transaction as a cash flow hedge, or (4) speculate in
foreign currency markets. One example of a U.S. company hedging against the risk of
changes in the exchange rates for foreign currencies is to use a forward exchange
receivable contract to partially offset the effects of changes in the exchange rates of the
foreign currency liability.

Q11-10 An exposed net asset position occurs when a company's trade receivables and
other assets denominated in a foreign currency are greater than its liabilities
denominated in that currency. An exposed net liability position occurs if a company's
liabilities denominated in a foreign currency exceed receivables denominated in that
currency.

Q11-11 A difference usually exists between a currency's spot rate and forward rate
because of the different economic factors involved in the determination of a future
versus present rate of exchange. This difference is usually positive because of
uncertainty and conservatism toward the future. For example, if inflation is assumed to
continue into the future in the foreign country whose currency is being acquired, the
forward rate will be higher than the spot rate because of the decreasing purchasing
power of the currency. In addition, the time value of money factor will typically result in a
higher forward exchange rate than the spot exchange rate.

11-2
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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Q11-12 (a) When an exposed foreign currency position exists, either an exposed net
asset or net liability position is created. The forward contract is valued at fair value,
usually by the forward exchange rate for the remainder of the term of the forward
contract. The underlying payable or receivable from the foreign currency transaction is
valued at the spot rate at the time of the transaction and adjusted to the current spot rate
at each balance sheet date. (b) For a hedge of an identifiable foreign currency
commitment, both the financial instrument and the forward contract aspects of the hedge
are valued at the forward rate. An account, termed firm commitment, is created during
the term of the forward contract to recognize the change in value of the financial
instrument aspect of the firm commitment. (c) For a cash flow hedge of a forecasted
transaction, the forward contract is valued at the forward rate, but the effective portion of
the change in the fair value of the forward contract is recognized in other comprehensive
income. The gain or loss on the re-measured foreign currency denominated account
payable or receivable is offset from a reclassification of other comprehensive income so
that there is no net exchange gain or loss from this hedge. (d) A speculative forward
contract is not a hedge, but rather is a derivative that is valued at fair value by using the
forward exchange rate for the remainder of the forward contract’s term.
Gains or losses on these forward contracts are recognized in income in the period in
which they occur.

SOLUTIONS TO CASES

C11-1 Effects of Changing Exchange Rates

a. The major factors influencing the demand for the U.S. dollar on the foreign exchange
markets are (1) rate of inflation, (2) the interest and investment rates, (3) balance of
payments, and (4) alternative investment opportunities. For example, the demand for the
U.S. dollar weakens as inflation rates increase, interest rates decrease, the balance of
payments becomes an increasingly high deficit, and alternative investments in other
countries are more readily available.

b. As the dollar drops in value in relation to other currencies:

(1) Exports from the U.S. to the other country become less expensive and foreign
buyers tend to increase their orders for U.S. goods. For example, assume the U.S.
dollar weakened relative to a foreign currency unit (FCU) as follows:

direct exchange rate = $0.50 / 1 FCU

after weakening = $0.60 / 1 FCU

This would mean that a U.S.-manufactured machine selling for $10,000 would cost
the foreign customer 20,000 FCU before the weakening of the dollar ($10,000 =
20,000 FCU x $0.50). After the weakening of the dollar, this same machine would
cost the foreign customer 16,667 FCU ($10,000 = 16,667 FCU x $0.60). This
means a significant price reduction for the foreign buyer, thereby increasing the
foreign demand for the U.S.-manufactured machine.

11-3
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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

(2) The opposite effect occurs for the U.S. business firm as the dollar weakens.
Foreign-made goods are now more expensive as it takes more dollars to acquire
imports. For example, a foreign-made part selling for 10 FCU before the weakening
costs the U.S. company $5.00 ($5.00 = 10 FCU x $0.50). After the dollar weakens,
the same part now costs the U.S. company $6.00 ($6.00 = 10 FCU x $0.60). This
increase of $1.00 per part is due solely to the weakening of the U.S. dollar relative
to the foreign currency. Nevertheless, the U.S. business firm is subject to a very
significant increase in the cost of its inputs.

c. As the dollar weakens, imports become more expensive for the U.S. consumer. In
addition, as in case b(2) above, the U.S.-based manufacturer using foreign-made
components for its products must now pass the higher costs on to its customers. Thus,
U.S. consumers have to pay higher prices for their goods that have foreign elements.

C11-2 Reporting a Foreign Currency Transaction on the Financial Statements

[AICPA Adapted]

a. Bow should report a foreign exchange loss on its 20X5 income statement. This loss is
calculated by taking the number of pounds that are due in 20X6 and multiplying them by
the change in the direct exchange rate from the transaction date to the balance sheet
date. Since the U.S. dollar weakened, the direct exchange rate on December 31, 20X5,
would be higher than the direct exchange rate on November 30, 20X5. The increase in
the direct exchange rate means that more U.S. dollars would be needed to purchase
pounds at December 31, 20X5, than at November 30, 20X5. Therefore, a foreign
currency transaction loss should be reported in 20X5 because the exchange rate
changed during 20X5. In addition, the accounts payable denominated in pounds should
be reported at the exchange rate at December 31, 20X5. This means that the accounts
payable recorded on November 30, 20X5, would have to be increased in order to reflect
a weakening U.S. dollar.

b. Reporting a foreign exchange loss in 20X5 is appropriate because, consistent with

accrual accounting, the exchange rate on December 31, 20X5, should be used to value
the accounts payable denominated in pounds. Bow's beliefs as to future exchange rate
movements are excluded from the financial statements.

C11-3 Changing Exchange Rates

Note to Teacher: Currency exchange rates may be found in a variety of places on the
Internet. A good site is http://finance.yahoo.com/currency-investing. Note that to obtain
the direct exchange rate, students will have to specify the conversion as the foreign
currency units into U.S. Dollars. After clicking the link for the conversion, both the current
exchange rate and a chart of historical exchange rates are presented. There are various
options for the length of time shown on the chart; the student should select the 2-year
chart. Other sites can be found using a search engine and search terms such as
“historical currency exchange rates.”

11-4
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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

C11-3 (continued)

Japanese Yen:

European Euro:

11-5
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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

C11-3 (continued)

British Pound:

Mexican Peso:

11-6
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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

C11-4 Accounting for Foreign Currency-Denominated Accounts Payable

MEMO

TO: Marie Lamont, Manager, Mardi Gras audit

From: ______________ _______________, CPA

Re: Mardi Gras Corporation’s Foreign Currency Transactions

Our client, Mardi Gras Corporation, needs to change its method of accounting for the
effects of changes in the exchange rate for Swiss francs. Currently, any difference
between the liability recorded when the merchandise is received and the amount that is
paid (in U.S. dollars) when the liability is settled is recorded by our client as an
adjustment to the cost of the inventory purchased. However, this difference is the result
of changes in the exchange rate for Swiss francs between the date of the inventory
purchase and the payment date and is not the result of changes in the price of the
merchandise.

Mardi Gras’s purchases from the Swiss company are foreign currency transactions that
result in Mardi Gras recording a payable denominated in Swiss francs. The liability is
fixed in terms of the amount of Swiss francs that must be paid.

Mardi Gras is recording the payable appropriately since they are using the exchange
rate on the date of the inventory purchase to convert the francs to dollars. This is
consistent with requirements in ASC 830. However, the accounting for subsequent
changes in the U.S. dollar equivalent of the Swiss franc liability is not acceptable. Rather
than an adjustment to the cost of inventory, changes in the liability that result because of
changes in the exchange rate between the U.S. dollar and the Swiss franc must be
recognized as a foreign currency transaction gain or loss and must be included in net
income in the period in which the rate change occurs.

Mardi Gras should also be aware that any outstanding foreign currency payables at the
balance sheet date should be adjusted to their U.S. dollar equivalent using the exchange
rate in effect on the balance sheet date, with any resulting foreign currency transaction
gains or losses included in earnings of the current period.

Disclosure of the aggregate gain or loss from foreign currency transactions used in
determining net income for a given period is also required.

Authoritative support for this memo can be found in the following references:

ASC 830-20-30, ASC 830-20-35, ASC 830-20-50

11-7
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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

C11-5 Accounting for Foreign Currency Forward Contracts

MEMO

To: Lindsay Williams, Treasurer

From: __________ ___________, CPA, Assistant Treasurer

Re: Financial Statement Effects of Foreign Currency Forward Contract

Avanti has entered into a contract to purchase equipment for a fixed price of 4.5 million
euros. This agreement meets the definition of an unrecognized firm commitment that has
both contractual rights and contractual obligations. The fixed price of the firm
commitment exposes the company to the fair value risk of changes in the price of the
equipment. However, because the purchase price is denominated in euros, the contract
also exposes the company to the risk of changes in the value of the foreign currency.
The company may enter into a derivative contract. ASC 815-20-25 allows such a
derivative contract of a foreign currency exposure of an unrecognized firm commitment
to be designated as a hedge.

If Avanti elects to use a forward exchange contract to fix the exchange rate to purchase
euros, the company can designate the forward contract as a foreign currency fair value
hedge of the foreign currency exposure in the firm commitment if there is formal
documentation of the hedging relationship and the rationale for the management’s
decision to use the hedge, and if the effectiveness of the hedge is assessed before
every reporting date and at least every three months.

If the forward contract qualifies as a foreign currency fair value hedge, the gain or loss
on the hedge and the offsetting gain or loss on the hedged firm commitment should be
recognized in earnings in the same accounting period.

Therefore, during the commitment period, there will be no effect on the income
statement; the gain or loss on the derivative will be offset by the loss or gain on the firm
commitment.

After the equipment is delivered, a foreign currency denominated payable will be

recorded and accounted for under ASC 830-20-30. Transaction gains or losses on the
foreign currency liability may continue to be offset by changes in the fair value of the
forward contract.

Authoritative support for this memo can be found in the following references:

ASC 815-20-25-23 through ASC 815-20-25-33, ASC 830-20-30

11-8
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

C11-6 Accounting for Hedges of Available-for-Sale Securities

MEMO

To: Mark Becker, CFO

From: ___________ _______________, CPA, Investment Division

Re: Hedge Accounting—Bond Portfolio

The proposal has been made to use an interest rate futures contract to hedge the
interest rate risk associated with Rainy Day’s portfolio of bond investments. Although the
use of the derivative may be expected to offset the changes in the value of the bond
portfolio, the issue that must be considered is whether the use of this derivative would
qualify for hedge accounting under ASC 815-20-25. If hedge accounting cannot be used,
the changes in the fair value of the futures contract will be included in net income.
However, the changes in the fair value of the bond portfolio will continue to be reported
as other comprehensive income, but not in net income.

ASC 815-20-25 does allow a portfolio of similar assets or similar liabilities to be

designated as the hedged item under certain conditions. The change in value of any
item in the portfolio must be generally proportionate to changes in value for the entire
portfolio. To meet this condition, Rainy Day should be able to demonstrate that the
values of the individual bonds within the portfolio respond to interest rate changes in a
proportionate manner to the overall portfolio response. Given the wide range of maturity
dates on the bonds in the portfolio, this condition may be difficult to meet.

If the aggregation criteria are not met, Rainy Day could consider aggregating bonds of
similar maturities into several sub-portfolios and using multiple derivatives to hedge the
interest rate risk associated with each group of bond investments. This subdividing of the
bond portfolio would also make it easier to demonstrate if the hedge is effective.

If hedge accounting is allowed, the effect on earnings of the derivative will be offset by
the changes in the fair value of the bond investment.

Authoritative support for this memo can be found in the following references:

ASC 815-20-25

11-9
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

SOLUTIONS TO EXERCISES

E11-1 Exchange Rates

a. Indirect exchange rates for pounds and dollars:

$1.00 = .625 British pounds (1 pound / $1.60)
$1.00 = 1.3514 Canadian dollars (1 Canadian dollar / $0.74)

$ $8,000
b. FCU = = = 5,000 British pounds
Direct Exchange Rate $1.60

c. 4,000 Canadian dollars x $0.74 = $2,960

E11-2 Changes in Exchange Rates

a. Exchange rates:

Arrival Date Departure Date

1 florin = $0.20 1 florin = $0.15

Direct
Exchange Rate ($200 / 1,000 florins) ($15 / 100 florins)

$1.00 = 5 florins $1.00 = 6.67 florins

Indirect
Exchange Rate (1,000 florins / $200) (100 florins / $15)

b. The direct exchange rate has decreased. This means that the dollar has
strengthened during Mr. Alt's visit. For example, upon arrival, Mr. Alt had to pay
$0.20 per each florin. Upon departure, however, each florin is worth just $0.15. This
means that the relative value of the dollar has increased or, alternatively, the value
of the florin has decreased.

c. The U.S. dollar equivalent values for the 100 florins are:

Arrival date
100 florins x $0.20 = $20
Departure date
100 florins x $0.15 = 15
Foreign Currency Transaction Loss $5

Mr. Alt held florins for a time in which the florin was weakening against the dollar.
Thus, Mr. Alt experienced a loss by holding the weaker currency.

11-10
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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

E11-3 Basic Understanding of Foreign Exposure

a. If the direct exchange rate increases, the U.S. dollar weakens relative to the foreign
currency unit. If the indirect exchange rate increases, the U.S. dollar strengthens relative
to the foreign currency unit.

b.

Settlement Direct Exchange Rate Indirect Exchange Rate

Transaction Currency Increases Decreases Increases Decreases

Importing Dollar NA NA NA NA
Importing LCU L G G L
Exporting Dollar NA NA NA NA
Exporting LCU G L L G

11-11
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
 Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

E11-4 Account Balances

Foreign Currency Units (€)

From receivable: To payable:
(€250,000 x $0.58) (7) 2/1/x7 145,000 (€125,000 x $0.58) (8) 2/1/x7 72,500

Bal. 2/2/x7 72,500

Accounts Receivable (€)

(€250,000 x$0.60) (1) 11/1/x6 150,000
[€250,000 x
($0.62 - $0.60)] (3) 12/31/x6 AJE 5,000
(€250,000 x $0.62) Bal. 12/31/x6 155,000
[€250,000
x ($0.58 - $0.62)] (5) 2/1/x7 AJE 10,000

(€250,000 x $0.58) Bal. 2/1/x7 145,000 (€250,000 x $0.58) (7) 2/1/x7 Settle 145,000
Bal. 2/2/x7 -0-

Accounts Payable (€)

(€125,000 x $0.60) (2) 11/1/x6 75,000
[€125,000
x ($0.62 - $0.60)] (4) 12/31/x6 AJE 2,500
(€125,000 x $0.62) Bal. 12/31/x6 77,500
[€125,000
x ($0.58 - $0.62)] (6) 2/1/x7 AJE 5,000
(€125,000 x $0.58) (8) 2/1/x7 Settle 72,500 (€125,000 x $0.58) Bal. 2/1/x7 72,500
Bal. 2/2/x7 -0-

Foreign Currency Transaction Loss

[€125,000
x ($0.62 - $0.60)] (4) 12/31/x6 AJE 2,500
[€250,000
x ($0.58 - $0.62)] (5) 2/1/x7 AJE 10,000

Foreign Currency Transaction Gain

[€250,000
x ($0.62 - $0.60)] (3) 12/31/x6 AJE 5,000
[€125,000
x ($0.58 - $0.62)] (6) 2/1/x7 AJE 5,000

11-12
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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

E11-5 Determining Year-End Account Balances for Import and Export

Transactions

Foreign
Foreign Currency Currency
Accounts Transaction Exchange Transaction
Receivable Accounts Payable Loss Exchange Gain

Case 1 NA $16,000(a) NA $2,000(b)

Case 2 $38,000(c) NA NA $2,000(d)

Case 3 NA $27,000(e) $3,000(f) NA

Case 4 $6,250(g) NA $1,250(h) NA

(a) LCU 40,000 x $0.40

(b) LCU 40,000 x ($0.40 - $0.45)
(c) LCU 20,000 x $1.90
(d) LCU 20,000 x ($1.90 - $1.80)
(e) LCU 30,000 x $0.90
(f) LCU 30,000 x ($0.90 - $0.80)
(g) LCU 2,500,000 x $0.0025
(h) LCU 2,500,000 x ($0.0025 - $0.003)

11-13
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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

E11-6 Transactions with Foreign Companies

a. May 1 Inventory (or Purchases) 8,400

Accounts Payable 8,400
Foreign purchase denominated in U.S. dollars.

June 20 Accounts Payable 8,400

Cash 8,400
Settle payable.

July 1 Accounts Receivable 10,000

Sales 10,000
Foreign sale denominated in U.S. dollars.

August 10 Cash 10,000

Accounts Receivable 10,000
Collect receivable.

b. May 1 Inventory (or Purchases) 8,400

Accounts Payable (¥) 8,400
Foreign purchase denominated in yen: $8,400 / $0.0070 = ¥1,200,000

June 20 Foreign Currency Transaction Loss 600

Accounts Payable (¥) 600
Revalue foreign currency payable to U.S. dollar equivalent value:
$9,000 = ¥1,200,000 x $0.0075 June 20 spot rate
- 8,400 = ¥1,200,000 x $0.0070 May 1 spot rate
$ 600 = ¥1,200,000 x ($0.0075 - $0.0070)

Accounts Payable (¥) 9,000

Foreign Currency Units (¥) 9,000
Settle payable denominated in yen.

July 1 Accounts Receivable (BRL) 10,000

Sales 10,000
Foreign sale denominated in Brazilian reals:
$10,000 / $0.20 = BRL50,000

August 10 Accounts Receivable (BRL) 1,000

Foreign Currency Transaction Gain 1,000
Revalue foreign currency receivable to U.S. dollar equivalent value:
$ 11,000 = BRL50,000 x $0.22 Aug. 10 spot rate
- 10,000 = BRL50,000 x $0.20 July 1 spot rate
$ 1,000 = BRL50,000 x ($0.22 - $0.20)

Foreign Currency Units (BRL) 11,000

Accounts Receivable (BRL) 11,000
Receive Brazilian reals in settlement of receivable.

11-14
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

E11-7 Foreign Purchase Transaction

a. Denominated in Swiss francs

Rone Imports reports in U.S. dollars

12/1/X1 12/31/X1 1/15/X2

Transaction Balance Sheet Settlement

Date Date Date
Direct Exchange Rate $0.70 $0.66 $0.68

b. December 1, 20X1
Inventory (or Purchases) 10,500
Accounts Payable (SFr) 10,500
$10,500 = SFr 15,000 x $0.70

December 31, 20X1

Accounts Payable (SFr) 600
Foreign Currency Transaction Gain 600
Revalue foreign currency payable to
equivalent U.S. dollar value:
$ 9,900 = SFr 15,000 x $0.66 Dec. 31 spot rate
-10,500 = SFr 15,000 x $0.70 Dec. 1 spot rate
$ 600 = SFr 15,000 x ($0.66 - $0.70)

January 15, 20X2

Foreign Currency Transaction Loss 300
Accounts Payable (SFr) 300
Revalue payable to current U.S. dollar equivalent:
$10,200 = SFr 15,000 x $0.68 Jan. 15, 20X2, value
- 9,900 = SFr 15,000 x $0.66 Dec. 31, 20X1, value
$ 300 = SFr 15,000 x ($0.68 - $0.66)

Accounts Payable (SFr) 10,200

Foreign Currency Units (SFr) 10,200
$10,200 = SFr 15,000 x $0.68

Accounts Payable (SFr)

(SFr 15,000 x 12/1/X1 10,500
$0.70)
AJE 12/31/X1 600
(SFr 15,000 x Bal 12/31/X1 9,900
$0.66)

AJE 1/15/X2 300

(SFr 15,000 x Bal 1/15/ X2 10,200
$0.68)
1/15/X2 Settlement 10,200
Bal 1/16/X2 -0-

11-15
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Other documents randomly have
different content
reticent stranger. Allen had struck Pawtuxet people as a vaguely
unnatural being and there was an universal belief that his thick
Vandyke beard was either dyed or false—a belief conclusively upheld
by the finding of such a false beard, together with a heavy pair of dark
glasses, in his room at the fateful bungalow. His voice, Mr. Ward
could well testify from his one telephone conversation, had a depth
and hollowness that could not be forgotten; and his glance seemed
malign even through his smoked and horn-rimmed glasses. One
shopkeeper, in the course of negotiations, had seen a specimen of
his handwriting and declared it was very queer and crabbed; this
being confirmed by penciled notes of no clear meaning found in his
room and identified by the merchant.
In connection with the vampirism ructions of the preceding summer, a
majority of the gossips believed that Allen rather than Ward was the
actual vampire. Statements were also obtained from the officials who
had visited the bungalow after the unpleasant incident of the motor
truck robbery. They had felt less of the sinister in Dr. Allen, but had
recognized him as the dominant figure in the queer shadowy cottage.
The place had been too dark for them to observe him clearly, but they
would know him again if they saw him. His beard had looked odd,
and they thought he had some slight scar above his dark spectacled
right eye. As for the search of Allen's room, it yielded nothing definite
save the beard and glasses, and several penciled notes in a crabbed
writing, which Willett at once saw was identical with that shared by
the old Curwen manuscripts and by the voluminous recent notes of
young Ward found in the vanished catacombs of horror.
Dr. Willett and Mr. Ward caught something of a profound, subtle, and
insidious cosmic fear from this data as it was gradually unfolded, and
almost trembled in following up the vague, mad thought which had
simultaneously reached their minds. The false beard and glasses, the
crabbed Curwen penmanship—the old portrait and its tiny scar—and
the altered youth in the hospital with such a scar—that deep, hollow
voice on the telephone—was it not of this that Mr. Ward was
reminded when his son barked forth those pitiable tones to which he
now claimed to be reduced? Who had ever seen Charles and Allen
together? Yes, some officials had once, but who later on? Was it not
when Allen left that Charles suddenly lost his growing fright and
began to live wholly at the bungalow? Curwen—Allen—Ward—in
what blasphemous and abominable fusion had two ages and two
persons become involved? That damnable resemblance of the
picture to Charles—had it not used to stare and stare, and follow the
boy around the room with its eyes? Why, too, did both Allen and
Charles copy Joseph Curwen's handwriting, even when alone and off
guard? And then the frightful work of those people—the lost crypt of
horrors that had aged the doctor overnight; the starved monsters in
the noisome pits; the awful formula which had yielded such nameless
results; the message in minuscules found in Willett's pocket; the
papers and the letters and all the talk of graves and "salts" and
discoveries—whither did everything lead? In the end Mr. Ward did the
most sensible thing. Steeling himself against any realization of why
he did it, he gave the detectives an article to be shewn to such
Pawtuxet shopkeepers as had seen the portentous Dr. Allen. That
article was a photograph of his luckless son, on which he now
carefully drew in ink the pair of heavy glasses and the black pointed
beard, which the men had brought from Allen's room.
For two hours he waited with the doctor in the oppressive house
where fear and miasma were slowly gathering as the empty panel in
the upstairs library leered and leered and leered. Then the men
returned. Yes, the altered photograph was a very passable likeness of
Dr. Allen. Mr. Ward turned pale, and Willett wiped a suddenly
dampened brow with his handkerchief. Allen—Ward—Curwen—it
was becoming too hideous for coherent thought. What had the boy
called out of the void, and what had it done to him? What really had
happened from first to last? Who was this Allen who sought to kill
Charles as too "squeamish," and why had his destined victim said in
the postscript to that frantic letter that he must be so completely
obliterated in acid? Why, too, had the minuscule message, of whose
origin no one dared think, said that "Curwen" must be likewise
obliterated? What was the change, and when had the final stage
occurred? That day when his frantic note was received—he had been
nervous all the morning, then there was an alteration. He had slipped
out unseen and swaggered boldly in past the men hired to guard him.
That was the time, when he was out. But no—had he not cried out in
terror as he entered his study—this very room? What had he found
there? Or wait—what had found him? That simulacrum which
brushed boldly in without having been seen to go—was that an alien
shadow and a horror forcing itself upon a trembling figure which had
never gone out at all? Had not the butler spoken of queer noises?

Willett rang for the man and asked him some low-toned questions. It
had, surely enough, been a bad business. There had been noises—a
cry, a gasp, a choking, and a sort of clattering or creaking or
thumping, or all of these. And Mr. Charles was not the same when he
stalked out without a word. The butler shivered as he spoke, and
sniffed at the heavy air that blew down from some open window
upstairs. Terror had settled definitely upon the house, and only the
businesslike detectives failed to imbibe a full measure of it. Even they
were restless, for this case had held vague elements in the
background which pleased them not at all. Dr. Willett was thinking
deeply and rapidly, and his thoughts were terrible ones. Now and
then he would almost break into muttering as he ran over in his head
a new, appalling, and increasingly conclusive chain of nightmare
happenings.
Then Mr. Ward made a sign that the conference was over, and
everyone save him and the doctor left the room. It was noon now, but
shadows as of coming night seemed to engulf the phantom-haunted
mansion. Willett began talking very seriously to his host, and urged
that he leave a great deal of the future investigation to him. There
would be, he predicted, certain obnoxious elements which a friend
could bear better than a relative. As family physician he must have a
free hand, and the first thing he required was a period alone and
undisturbed in the abandoned library upstairs, where the ancient
overmantel had gathered about itself an aura of noisome horror more
intense than when Joseph Curwen's features themselves glanced
slyly down from the painted panel.
Mr. Ward, dazed by the flood of grotesque morbidities and
unthinkably maddening suggestions that poured in upon him from
every side, could only acquiesce; and half an hour later the doctor
was locked in the shunned room with the paneling from Olney Court.
The father, listening outside, heard fumbling sounds of moving and
rummaging as the moments passed; and finally a wrench and a
creak, as if a tight cupboard door were being opened. Then there was
a muffled cry, a kind of snorting choke, and a hasty slamming of
whatever had been opened. Almost at once the key rattled and Willett
appeared in the hall, haggard and ghastly, and demanding wood for
the real fireplace on the south wall of the room. The furnace was not
enough, he said; and the electric log had little practical use. Longing
yet not daring to ask questions, Mr. Ward gave the requisite orders
and a man brought some stout pine logs, shuddering as he entered
the tainted air of the library to place them in the grate. Willett
meanwhile had gone up to the dismantled laboratory and brought
down a few odds and ends not included in the moving of the July
before. They were in a covered basket, and Mr. Ward never saw what
they were.
Then the doctor locked himself up in the library once more, and by
the clouds of smoke which rolled down past the windows from the
chimney it was known that he had lighted the fire. Later, after a great
rustling of newspapers, that odd wrench and creaking were heard
again; followed by a thumping which none of the eavesdroppers liked.
Thereafter two suppressed cries of Willett's were heard, and hard
upon these came a swishing rustle of indefinable hatefulness. Finally
the smoke that the wind beat down from the chimney grew very dark
and acrid, and everyone wished that the weather had spared them
this choking and venomous inundation of peculiar fumes. Mr. Ward's
head reeled, and the servants all clustered together in a knot to watch
the horrible black smoke swoop down. After an age of waiting the
vapors seemed to lighten, and half-formless sounds of scraping,
sweeping, and other minor operations were heard behind the bolted
door. And at last, after the slamming of some cupboard within, Willett
made his appearance, sad, pale and haggard, and bearing the cloth-
draped basket he had taken from the upstairs laboratory. He had left
the window open, and into that once accursed room was pouring a
wealth of pure, wholesome air to mix with a queer new smell of
disinfectants. The ancient overmantel still lingered; but it seemed
robbed of malignity now, and rose as calm and stately in its white
paneling as if it had never borne the picture of Joseph Curwen. Night
was coming on, yet this time its shadows held no latent fright, but
only a gentle melancholy. Of what he had done the doctor would
never speak. To Mr. Ward he said, "I can answer no questions, but I
will say that there are different kinds of magic. I have made a great
purgation. Those in this house will sleep the better for it."

That Dr. Willett's "purgation" had been an ordeal almost as nerve-

racking in its way as his hideous wandering in the vanished crypt is
shewn by the fact that the elderly physician gave out completely as
soon as he reached home that evening. For three days he rested
constantly in his room, though servants later muttered something
about having heard him after midnight on Wednesday, when the outer
door softly opened, and closed with phenomenal softness. Servants'
imaginations, fortunately, are limited, else comment might have been
excited by an item in Thursday's Evening Bulletin which ran as
follows:
North End Ghouls Again Active
After a lull of ten months since the dastardly vandalism in the
Weeden lot at the North Burial Ground, a nocturnal prowler was
glimpsed early this morning in the same cemetery by Robert Hart, the
night watchman. Happening to glance for a moment from his shelter
at about two a.m., Hart observed a glow of a lantern or pocket torch
not far to the northward, and upon opening the door detected the
figure of a man with a trowel very plainly silhouetted against a nearby
electric light. At once starting in pursuit, he saw the figure dart
hurriedly toward the main entrance, gaining the street and losing
himself among the shadows before approach or capture was
possible.
Like the first of the ghouls active during the past year, this intruder
had done no real damage before detection. A vacant part of the Ward
lot shewed signs of a little superficial digging, but nothing even nearly
the size of a grave had been attempted, and no previous grave had
been disturbed.
Hart, who cannot describe the prowler except as a small man
probably having a full beard, inclines to the view that all three of the
digging incidents have a common source; but police from the Second
Station think otherwise on account of the savage nature of the
second incident, where an ancient coffin was removed and its
headstone violently shattered.
The first of the incidents, in which it is thought an attempt to bury
something was frustrated, occurred a year ago last March, and has
been attributed to bootleggers seeking a cache. It is possible, says
Sergeant Riley, that this third affair is of similar nature. Officers at the
Second Station are taking especial pains to capture the gang of
miscreants responsible for these repeated outrages.
All day Thursday Dr. Willett rested as if recuperating from something
past or nerving himself for something to come. In the evening he
wrote a note to Mr. Ward, which was delivered the next morning and
which caused the half-dazed parent to ponder long and deeply. Mr.
Ward had not been able to go down to business since the shock of
Monday with its baffling reports and its sinister "purgation," but he
found something calming about the doctor's letter in spite of the
despair it seemed to promise and the fresh mysteries it seemed to
evoke.
10 Barnes St.,
Providence, R. I.,
April 12, 1928.
Dear Theodore:
I feel that I must say a word to you before doing what I am going to
do tomorrow. It will conclude the terrible business we have been
going through (for I feel that no spade is ever likely to reach that
monstrous place we know of), but I'm afraid it won't set your mind at
rest unless I expressly assure you how very conclusive it is.
You have known me ever since you were a small boy, so I think you
will not distrust me when I hint that some matters are best left
undecided and unexplored. It is better that you attempt no further
speculation as to Charles's case, and almost imperative that you tell
his mother nothing more than she already suspects. When I call on
you tomorrow Charles will have escaped. That is all which need
remain in anyone's mind. He was mad, and he escaped.
So don't ask me any questions when I call. It may be that something
will go wrong, but I'll tell you if it does. I don't think it will. There will be
nothing more to worry about, for Charles will be very, very safe. He is
now—safer than you dream. You need hold no fears about Allen, and
who or what he is. He forms as much a part of the past as Joseph
Curwen's picture, and when I ring your doorbell you may feel certain
that there is no such person. And what wrote that minuscule message
will never trouble you or yours.
But you must steel yourself to melancholy, and prepare your wife to
do the same. I must tell you frankly that Charles's escape will not
mean his restoration to you. He has been afflicted with a peculiar
disease, as you must realize from the subtle physical as well as
mental changes in him, and you must not hope to see him again. He
stumbled on things no mortal ought ever to know, and reached back
through the years as no one ever should reach; and something came
out of those years to engulf him.
And now comes the matter in which I must ask you to trust me most
of all. For there will be, indeed, no uncertainty about Charles's fate. In
about a year, say, you can if you wish devise a suitable account of the
end, for the boy will be no more. You can put up a stone in your lot at
the North Burial ground exactly ten feet west of your father's and
facing the same way, and that will mark the true resting-place of your
son. Nor need you fear that it will mark any abnormality or
changeling. The ashes in that grave will be those of your own
unaltered bone and sinew—of the real Charles Dexter Ward whose
mind you watched from infancy—the real Charles with the olive-mark
on his hip and without the black witch-mark on his chest or the pit on
his forehead. The Charles who never did actual evil, and who will
have paid with his life for his "squeamishness."
That is all. Charles will have escaped, and a year from now you can
put up his stone. Do not question me tomorrow. And believe that the
honour of your ancient family remains untainted now, as it has been
at all times in the past.
With profoundest sympathy, and exhortations to fortitude, calmness,
and resignation, I am ever
Sincerely your friend,
Marinus B. Willett.

So on the morning of Friday, April 13, 1928, Marinus Bicknell Willett

visited the room of Charles Dexter Ward at Dr. Waite's private
hospital on Conanicut Island. After the interchange of a few strained
formalities, a new element of constraint crept in, as Ward seemed to
read behind the doctor's masklike face a terrible purpose which had
never been there before.
Ward actually turned pale, and the doctor was the first to speak.
"More," he said, "has been found out, and I must warn you fairly that
a reckoning is due."
"Digging again, and coming upon more poor starving pets?" was the
ironic reply. It was evident that the youth meant to shew bravado to
the last.
"No," Willett slowly rejoined, "this time I did not have to dig. We have
had men looking up Dr. Allen, and they found the false beard and
spectacles in the bungalow!"
"Excellent," commented the disquieted host in an effort to be wittily
insulting, "and I trust they proved more becoming than the beard and
glasses you now have on!"
"They would become you very well," came the even and studied
response, "as indeed they seem to have done."
As Willett said this, it almost seemed as though a cloud passed over
the sun; though there was no change in the shadows on the floor.
Then Ward ventured:
"And is this what asks so hotly for a reckoning? Suppose a man does
find it now and then useful to be twofold?"
"No," said Willett gravely, "again you are wrong. It is no business of
mine if any man seeks duality; provided he has any right to exist at
all, and provided he does not destroy what called him out of space."
Ward now started violently. "Well, Sir, what have ye found, and what
d'ye want with me?"
The doctor let a little time elapse before replying, as if choosing his
words for an effective answer.
"I have found," he finally intoned, "something in a cupboard behind an
ancient overmantel where a picture once was, and I have burned it
and buried the ashes where the grave of Charles Dexter Ward ought
to be."
The madman choked and sprang from the chair in which he had been
sitting:
"Damn ye, who did ye tell—and who'll believe it was he after these
full two months, with me alive? What d'ye mean to do?"
Willett, though a small man, actually took on a kind of judicial majesty
as he calmed the patient with a gesture.
"I have told no one. This is no common case—it is a madness out of
time and a horror from beyond the spheres which no police or
lawyers or courts or alienists could ever fathom or grapple with. You
cannot deceive me, Joseph Curwen, for I know that your accursed
magic is true!
"I know how you wove the spell that brooded outside the years and
fastened on your double and descendant; I know how you drew him
into the past and got him to raise you up from your detestable grave; I
know how he kept you hidden in his laboratory while you studied
modern things and roved abroad as a vampire by night, and how you
later shewed yourself in beard and glasses that no one might wonder
at your godless likeness to him; I know what you resolved to do when
he balked at your monstrous rifling of the world's tombs, and at what
you planned afterward, and I know how you did it.
"You left off your beard and glasses and fooled the guards around the
house. They thought it was he who went in, and they thought it was
he who came out when you had strangled and hidden him. But you
hadn't reckoned on the different contacts of two minds. You were a
fool, Curwen, to fancy that a mere visual identity would be enough.
Why didn't you think of the speech and the voice and the
handwriting? It hasn't worked, you see, after all. You know better than
I who or what wrote that message in minuscules, but I will warn you it
was not written in vain. There are abominations and blasphemies
which must be stamped out, and I believe that the writer of those
words will attend to Orne and Hutchinson. One of those creatures
wrote you once, 'do not call up any that you cannot put down.'
Curwen, a man can't tamper with Nature beyond certain limits, and
every horror you have woven will rise up to wipe you out."

But here the doctor was cut short by a convulsive cry from the
creature before him. Hopelessly at bay, weaponless, and knowing
that any show of physical violence would bring a score of attendants
to the doctor's rescue, Joseph Curwen had recourse to his one
ancient ally, and began a series of cabalistic motions with his
forefingers as his deep, hollow voice, now unconcealed by feigned
hoarseness, bellowed out the opening words of a terrible formula.
"PER ADONAI ELOIM, ADONAI JEHOVA, ADONAI SABAOTH,
METRATON...."
But Willett was too quick for him. Even as the dogs in the yard
outside began to howl, and even as a chill wind sprang suddenly up
from the bay, the doctor commenced the solemn and measured
intonation of that which he had meant all along to recite. An eye for
an eye—magic for magic—let the outcome shew how well the lesson
of the abyss had been learned! So in a clear voice Marinus Bicknell
Willett began the second of that pair of formulae whose first had
raised the writer of those minuscules—the cryptic invocation whose
heading was the Dragon's Tail, sign of the descending node—
At the very first word from Willett's mouth the previously commenced
formula of the patient stopped short. Unable to speak, the monster
made wild motions with his arms until they too were arrested. When
the awful name of Yog-Sothoth was uttered, the hideous change
began. It was not merely a dissolution, but rather a transformation or
recapitulation; and Willett shut his eyes lest he faint before the rest of
the incantation could be pronounced.
But he did not faint, and that man of unholy centuries and forbidden
secrets never troubled the world again. The madness out of time had
subsided, and the case of Charles Dexter Ward was closed. Opening
his eyes before staggering out of that room of horror, Dr. Willett saw
that what he had kept in memory had not been kept amiss. There
had, as he had predicted, been no need for acids. For like his
accursed picture a year before, Joseph Curwen now lay scattered on
the floor as a thin coating of fine bluish-gray dust.
*** END OF THE PROJECT GUTENBERG EBOOK THE CASE OF
CHARLES DEXTER WARD ***

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