Please refer to below: ParentCo is a calendar year domestic corporation that ord

Question

Please refer to below:

ParentCo is a calendar year domestic corporation that ordered Product X from ExternalCo (foreign corporation) on November 1, 2013. The cost of Product X is 1,000,000FC (the foreign currency denomination). They enter into an agreement for the delivery of Product X by January 31, 2014. ParentCo entered into a forward exchange contract to acquire 1,000,000FC at a forward rate of $1.23/FC on January 31, 2014. Currently, the exchange rate between U.S. and the foreign country is S1.20/FC. Using the applicable rates from above, explain the type of hedge that is being used and show the journal entries for all related transactions on 11/1/2013,12/31/2013 and the 1/31/2014. In addition, show the effectiveness of the hedge. Explain how the journal entries affect the balance sheet and income statement of ParentCo (use examples to support your responses). Describe the effectiveness of the hedge. Show and explain all calculations.

Explanation / Answer

On 1st November, To Record a Purchase @ Spot of $1.2/FC Inventory 1200000 To Accounts Payable 1200000 On 31st December, Loss on Foreign Exchange 50000 To Accounts Payable 50000 (To Record Value of AP at Spot $1.25) Forex Hedge 30000 To Gain on Foreign Exchange 30000 (To Record Gain on Hegde) (1.23-1.26) Future was Purchased on 1st Nov @1.23/FC 31st January Loss on Foreign Exchange 50000 To Accounts Payable 50000 (To Record Value of AP at Spot $1.30) Forex Hedge 40000 To Gain on Forex Exchange 40000 (To Record Gain on Hegde) (1.26-1.3) Accounts Payable 1300000 To Cash 1300000 (Payment Made @ Spot 1.3/$)

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