Forward exchange contract designated as a fair value hedge of a foreign-currency-denominated accounts payable, strengthening $US On October 20, 2018, our company purchased from a company located in Slovenia 100,000 units of a product at a purchase price of €7.00 per unit. Our company is required to pay for the merchandise in Euros (€). The exchange rate on the date of purchase is $1.48:€1, and the due date for our payment is January 20, 2019. To mitigate the risk of exchange rate fluctuations between the purchase date and the payment date, on October 20, 2018, our company enters into a forward contract with an exchange broker. The contract obligates our company to buy €700,000 on January 20, 2019, while we lock in the $US we will pay for the Euros on that date at the forward rate of $1.45:€1 (i.e., the forward rate on October 20, 2018, for settlement on January 20, 2019). Assume this derivative qualifies as a fair value hedge, and our company’s functional currency and reporting currency is the $US. The following table includes the spot rates, forward rates, and related values of the accounts payable and forward contract on October 20, 2018, December 31, 2018, and January 20, 2019. When computing fair values, ignore discounting.
Forward exchange contract designated as a fair value hedge of a foreign-currency-denominated accounts payable, strengthening $US
On October 20, 2018, our company purchased from a company located in Slovenia 100,000 units of a product at a purchase price of €7.00 per unit. Our company is required to pay for the merchandise in Euros (€). The exchange rate on the date of purchase is $1.48:€1, and the due date for our payment is January 20, 2019. To mitigate the risk of exchange rate fluctuations between the purchase date and the payment date, on October 20, 2018, our company enters into a forward contract with an exchange broker. The contract obligates our company to buy €700,000 on January 20, 2019, while we lock in the $US we will pay for the Euros on that date at the forward rate of $1.45:€1 (i.e., the forward rate on October 20, 2018, for settlement on January 20, 2019). Assume this derivative qualifies as a fair value hedge, and our company’s functional currency and reporting currency is the $US. The following table includes the spot rates, forward rates, and related values of the accounts payable and forward contract on October 20, 2018, December 31, 2018, and January 20, 2019. When computing fair values, ignore discounting.
| FC Accounts Payable | Derivative—Forward | |||||
|---|---|---|---|---|---|---|
| Date | Spot Rate ($US = €1) |
Carrying Value |
Change in Carry Val. |
Forward Ratea ($US = €1) |
FV Asset (Liability)b |
Change in FV |
| October 20, 2018 | 1.48 | $(1,036,000) | 1.45 | |||
| December 31, 2018 | 1.41 | (987,000) | $49,000 | 1.40 | $(35,000) | $(35,000) |
| January 20, 2019 | 1.38 | (966,000) | 21,000 | 1.38 | (49,000) | (14,000) |
a For settlement on January 20, 2019
b Ignore discounting in the computation of fair values.
a. Prepare the
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