Forward exchange contract designated as a fair value hedge of a foreign-currency-denominated firm commitment to sell inventory, weakening SUS Dur U.S.-based company enters into a "firm commitment" with Malta-based retailer on November 10, 2018. The firm commitment requires our company to sell 70,000 units of an inventory item costing €9.00 each to the Maltese company. Our company is contractually committed to ship the inventory (i.e., title transfers) on February 10, 2019, with payment in Euros on the same date. Our company does recurring business with the Maltese company, and the firm commitment includes significant monetary penalties for nonperformance. Also assume, on November 10, 2018, our company enters into a contract with a foreign currency exchange broker to sell Euros (for settlement on February 10, 2019) to mitigate the risk of exchange rate fluctuation. Our company's functional currency is the U.S. dollar and our forward exchange contract qualifies as a fair value hedge. The relevant exchange rates and related balances for the period from November 10, 2018, to February 10, 2019, are as follows: Derivative-Forward Forward Spot Rate Sale Rate FV Asset Change (SUS - €1) Transaction (SUS - €1) (Liability)b in FV Date November 10, 2018 1.18 1.20 December 31, 2018 1.22 1.25 $(31,500) $(31,500) February 10, 2019 1.27 S800,100 1,27 (44,100) (12,600) 'For settlement on February 10, 2019 Ignore discounting in the computation of fair values. a. Prepare the journal entries to record the sale and all adjustments required for the firm commitment and forward contract at November 10, 2018, December 31, 2018, and February 10, 2019. Note: If no entry is required, select "No entry" as your answers under Description and leave the debit and credit answers blank (zero). Hedged Transaction Date Description Debit Credit 11/10/18
Forward exchange contract designated as a fair value hedge of a foreign-currency-denominated firm commitment to sell inventory, weakening SUS Dur U.S.-based company enters into a "firm commitment" with Malta-based retailer on November 10, 2018. The firm commitment requires our company to sell 70,000 units of an inventory item costing €9.00 each to the Maltese company. Our company is contractually committed to ship the inventory (i.e., title transfers) on February 10, 2019, with payment in Euros on the same date. Our company does recurring business with the Maltese company, and the firm commitment includes significant monetary penalties for nonperformance. Also assume, on November 10, 2018, our company enters into a contract with a foreign currency exchange broker to sell Euros (for settlement on February 10, 2019) to mitigate the risk of exchange rate fluctuation. Our company's functional currency is the U.S. dollar and our forward exchange contract qualifies as a fair value hedge. The relevant exchange rates and related balances for the period from November 10, 2018, to February 10, 2019, are as follows: Derivative-Forward Forward Spot Rate Sale Rate FV Asset Change (SUS - €1) Transaction (SUS - €1) (Liability)b in FV Date November 10, 2018 1.18 1.20 December 31, 2018 1.22 1.25 $(31,500) $(31,500) February 10, 2019 1.27 S800,100 1,27 (44,100) (12,600) 'For settlement on February 10, 2019 Ignore discounting in the computation of fair values. a. Prepare the journal entries to record the sale and all adjustments required for the firm commitment and forward contract at November 10, 2018, December 31, 2018, and February 10, 2019. Note: If no entry is required, select "No entry" as your answers under Description and leave the debit and credit answers blank (zero). Hedged Transaction Date Description Debit Credit 11/10/18
Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN:9781285190907
Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Chapter9: Operating Activities
Section: Chapter Questions
Problem 22PC
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Transcribed Image Text:Forward exchange contract designated as a fair value hedge of a foreign-currency-denominated firm commitment to sell inventory, weakening SUS
Our U.S.-based company enters into a "firm commitment" with Malta-based retailer on November 10, 2018. The firm commitment requires our company to sell 70,000 units of an inventory item
costing €9.00 each to the Maltese company. Our company is contractually committed to ship the inventory (i.e., title transfers) on February 10, 2019, with payment in Euros on the same date. Our
company does recurring business with the Maltese company, and the firm commitment includes significant monetary penalties for nonperformance. Also assume, on November 10, 2018, our
company enters into a contract with a foreign currency exchange broker to sell Euros (for settlement on February 10, 2019) to mitigate the risk of exchange rate fluctuation. Our company's functional
currency is the U.S. dollar and our forward exchange contract qualifies as a fair value hedge. The relevant exchange rates and related balances for the period from November 10, 2018, to February
10, 2019, are as follows:
Derivative-Forward
Forward
Spot Rate
Sale
Rate
FV Asset Change
in FV
Date
($US - €1) Transaction (SUS - €1) (Liability)"
November 10, 2018
1.18
1.20
December 31, 2018
1.22
1.25
$(31,500) $(31,500)
February 10, 2019
1.27
S800,100
1.27
(44,100) (12,600)
a For settlement on February 10, 2019
Ignore discounting in the computation of fair values.
a. Prepare the journal entries to record the sale and all adjustments required for the firm commitment and forward contract at November 10, 2018, December 31, 2018, and February 10, 2019.
Note: If no entry is required, select "No entry" as your answers under Description and leave the debit and credit answers blank (zero).
Hedged Transaction
Date
Description
Debit
Credit
11/10/18
12/31/18
2/10/19
수
To record sale of inventory.
To record change in value.
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