On October 1, 2020, Mertag Company (a U.S.-based company) receives an order from a customer in Poland to deliver goods onJanuary 31, 2021, for a price of 1,026,000 Polish zlotys (PLN). Mertag enters into a forward contract on October 1, 2020, to sell PLN1,026,000 in four months (on January 31, 2021). U.S. dollar-Polish zloty exchange rates are as follows:Forward RateSpot Rate$ 0.27(to January 31, 2021)$ 0.31DateOctober 1. 2020December 31, 20200.300.34January 31, 20210.32N/AMertag designates the forward contract as a fair value hedge of a foreign currency firm commitment. The fair value of the firmcommitment is measured by referring to changes in the forward rate, and, therefore, forward points are included in assessing hedgeeffectiveness. Mertag must close its books and prepare financial statements on December 31. Discounting to present value can beignored.a. Prepare journal entries for the foreign currency forward contract, foreign currency firm commitment, and export sale.b. Determine the net benefit, if any, realized by Mertag from entering into the forward contract.Complete this question by entering your answers in the tabs below.Required ARequired BPrepare journal entries for the foreign currency forward contract, foreign currency firm commitment, and export sale. (Do not roundintermediate calculations. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)View transaction list< Prev7 of 8Next >

Forward contract: Forward contract can be defined as the agreement between two parties i.e. buyer…

f 1,026,000 Polish zlotys (PLN). Mertag enters into a forward contract on October 1, 2020 lanuary 31, 2021). U.S. dollar-Polish zloty exchange rates are as follows: Forward Rate -pot Rate $ 0.27 (to January 31, 2021) $ 0.31 0.30 0.34 0.32 N/A d contract as a fair value hedge of a foreign currency firm commitment. The fair value of eferring to changes in the forward rate, and, therefore, forward points are included in as ose its books and prepare financial statements on December 31. Discounting to present he foreicun cuurrencu fonward contract foreian Currena firm co mmit mont and oxn ert

f 1,026,000 Polish zlotys (PLN). Mertag enters into a forward contract on October 1, 2020 lanuary 31, 2021). U.S. dollar-Polish zloty exchange rates are as follows: Forward Rate -pot Rate $ 0.27 (to January 31, 2021) $ 0.31 0.30 0.34 0.32 N/A d contract as a fair value hedge of a foreign currency firm commitment. The fair value of eferring to changes in the forward rate, and, therefore, forward points are included in as ose its books and prepare financial statements on December 31. Discounting to present he foreicun cuurrencu fonward contract foreian Currena firm co mmit mont and oxn ert

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter10: Measuring Exposure To Exchange Rate Fluctuations

Section: Chapter Questions

Problem 2ST

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On September 30, 2020, Chicken Ltd., a Canadian company, entered into a contract to purchase goodsfrom Wing Ltd., a foreign corporation. The terms of the contract call for the goods to be delivered toChicken Ltd.'s Edmonton location on May 30, 2021. The cost of goods is EUR $1,000,000 to be settled onJuly 31, 2021. On September 30, 2020, Chicken Ltd. also arranged for a forward contract through its bank for EUR$1,000,000. The goods were delivered on time, and Chicken Ltd, settled with Wing Ltd. on July 31, 2021.Chicken Ltd. has a April 30 year-end.The spot and forward rates are as follows: Spot Rate ($CAD)1 USD = x.xX CAD Forward Rate($CAD)1 USD = XXX CAD September 30, 2020 $1.42 $1.46 April 30, 2021 $1.44 $1.48 May 30, 2021 $1.45 $1.49 July 31, 2021 $1.50 $1.50 RequiredPrepare Chicken Ltd.'s journal entries to reflect the above assuming that:a. the hedge is a cash flow hedge, andb. the hedge is a fair value hedge.
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