Could someone please help me with this? I would like to check my work. Thank you

Question

Could someone please help me with this? I would like to check my work. Thank you.

37. On October 1, 2017, Sharp Company (based in Denver, Colorado) entered into a forward contradt to sell 100,000 rubles in four months (on January 31, 2018) and receive $39,000 in U.S. dollars Exchange rates for the ruble follow: Date October 1, 2017 December 31, 2017 January 31, 2018 Spot Rate $0.35 0.38 0.40 Forward Rate (to January 31, 2018) $0.39 0.41 N/A Sharp's incremental borrowing rate is 12 percent. The present value factor for one month at an annual interest rate of 12 percent (1 percent per month) is 0.9901. Sharp must close its books and prepare financial statements on December 3 a. Prepare journal entries, assuming that Sharp entered into the forward contract as a fair value hedge of a 100,000 ruble receivable arising from a sale made on October 1, 2017. Include entries for both the sale and the forward contract. b. Prepare journal entries, assuming that Sharp entered into the forward contract as a fair value hedge of a firm commitment related to a 100,000 ruble sale that will be made on January 31, 2018. Include entries for both the firm commitment and the forward contract. The fair value of the firm commitment is measured by referring to changes in the forward rate.

Explanation / Answer

Journal Entry for Forward Contract hedge Date Particulars Debit($) Credit($) 01-Oct Accounts receivable $35,000.00 To Sales ( 100,000 x 0.35) $35,000.00 There is no formal entry for the forward contract. 31-Dec Accounts Receivable $3,000.00 To Foreign Exchange gain (($.38-$.35) x 100,000) $3,000.00 31-Dec Loss on forward contract $1,980.20 To Forward Contract (($.41-$.39) x 100,000)=2,000 2000 x 0.9901=1980.20 $1,980.20 31-Jan Accounts Receivable (LCU) $2,000.00 To Foreign Exchange gain (($.40-$.38) x 100000) $2,000.00 Forward Contract $980.20 To Gain on forward contract (($0.40-$0.39)x100000=1000(loss) $980.20 1000(loss)-1980.2(recognized earlier now reversed) 31-Jan Foreign Currency $40,000.00 To Accounts receivable(35000+3000+2000) $40,000.00 31-Jan Cash $39,000.00 Forward Contract $1,000.00 To Foreign Currency (LCU) $40,000.00 Journal Entry for Forward Contract hedge of a firm commitment Date Particulars Debit($) Credit($) 01-Oct There is no formal entry for the forward contract or firm commitment 31-Dec Loss on forward contract $1,980.20 To Forward Contract (($.41-$.39) x 100,000) x 0.9901=1,980.20 $1,980.20 31-Dec Firm Commitment $1,980.20 To Gain on firm Commitment(($.41-$.39) x 100,000) x 0.9901=1,980.20 $1,980.20 31-Jan Forward Contract $980.20 To Gain on forward contract(($0.40-$0.39)x100000=1000(loss) $980.20 1000(loss)-1980.2(recognized earlier now reversed) 31-Jan Loss on firm commitment $980.20 To Firm Commitment $980.20 31-Jan Foreign Currency $40,000.00 To Sales $40,000.00 31-Jan Cash $39,000.00 Forward Contract $1,000.00 To Foreign Currency $40,000.00 31-Jan Sales $1,000.00 To Firm Commitment $1,000.00

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