Required Information On October 1, 2018, Jarvis Co. sold inventory to a customer

Question

Required Information On October 1, 2018, Jarvis Co. sold inventory to a customer in a foreign country, denominated in 100,000 local currency units (LCU).Collection is expected in four months. On October 1, 2018, a forward exchange contract was acquired whereby Jarvis Co. was to pay 100,000 LCU in four months (on February 1, 2019) and receive $78,000 in U.S. dollars. The spot and forward rates for the LCU were as follows Rate DescriptionExchange Rate .83-1 LCU 5.85 1 LCU Spot rate: Spot rate: 1-Month Forward Rate $.be = 1 LCU Spot rate: October 1, 2018 December 31, 2018 February 1, 2019 .86 1 LCU The,company's borrowing rate is 12%. The present value factor for one month is .9901. Any discount or premium on the contract is amortized using the straight-line method , Assuming this is a cash flow hedge: prepare journal entries for this sales transaction and forward contract

Explanation / Answer

Journal Entry Date Account Tittle Debit Credit 01/10/2018 Accounts Receivables                  Dr.          83,000 Sales          83,000 To Record Sales 31/12/2018 Accounts Receivables                 Dr.            2,000 Forward exchange Gain            2,000 To Record Exchange Gain on Fluctuation 31/12/2018 Loss on Forward Contract         Dr.            1,980 Forward Contract            1,980 To Recocrd Loss on Forward Contract 01/02/2019 Accounts Receivables                 Dr.            1,000 Forward exchange Gain            1,000 To Record Exchange Gain on Fluctuation 01/02/2019 Loss on Forward Contract         Dr.            6,020 Forward Contract            6,020 To Recocrd Loss on Forward Contract 01/02/2019 Foreign Currency                          Dr.          86,000 Accounts Receivables          86,000 To Record Payamement made 01/02/2019 Cash                                                   Dr.          78,000 Forward Contract                         Dr.            8,000 Foreign Currency          86,000 To Record Settlement of Forward Contract Working Note Date Spot Value Change Forward Adjustment 01/10/2018               0.83          83,000             0.78 31/12/2018               0.85          85,000             2,000             0.80               (1,980) 01/02/2019               0.86          86,000             1,000             0.86               (6,020) Adjustment on 31/12/18 = [(0.80 - 0.78) X 100000] X 2000 X 0.9901 = 1980 Adjustment on 1/12/19 = [(0.78 - 0.86) 100000] = 8000 - 1980 = 6020

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