On December 1, 2015 the Good-Buy Company (American) sold inventory to the Adios
ID: 2456031 • Letter: O
Question
On December 1, 2015 the Good-Buy Company (American) sold inventory to the Adios Company (Mexican), with payment of 12,000 pesos to be received March 1, 2016. The Good-Buy Company enters into a forward contract on December 1, 2015 to sell the 12,000 pesos. Information on the exchange rates of the dollar with the peso are as follows:
Good-Buy’s borrowing rate is 12% (1% per month)
Good-Buy has determined that this is a cash flow hedge and recognizes any premium or discounts under the straight line method.
REQUIRED: PREPARE ALL JOURNAL ENTRIES GOOD-BUY MAKES ON
DEC. 1, 2015
DEC. 31, 2015
MARCH 1, 2016
Date Spot rate Forward rate Dec. 1 2015 $2.30 $2.38 Dec. 31, 2015 $2.40 $2.50 Mar. 1, 2016 $2.55 $2.89Explanation / Answer
Journal Entries
Date Particulars Debit Credit 1.12.2015 Foreign Debtor's Recievable A/c Dr. $27600 To Sales Revenue A/c $27600 For entering into forward contract 1.12.2015 Forward Contract Recievable($) A/c Dr. $28560 To Forward exchange premium A/c Dr. $960 To Forward Contract payable(pesos) A/c $27600 Writting off forward exchange premium Premium to be written off = (960/91) x 30 = 316 31.12.2015 Forward exchange premium A/c Dr. $316 To Profit and loss A/c $316 For subsequent recognition of debtors 31.12.2015 Foreign Debtor's recievable A/c Dr. $1200 To Forward contract payable(pesos) A/c $1200 For reciept of payment from debtor 1.03.2016 Bank A/c Dr. $30600 To Foreign exchange gain A/c Dr. $1800 To Foreign debtors recievable A/c $28800 For executing forward contract 1.03.2016 Forward Contract Payable A/c Dr. $28800 Foreign exchange loss A/c Dr. $1800 To Bank A/c $30600 For amount recieved from bank under forward contract Bank A/c Dr. $28560 To Forward contract recievable($) Dr. $28560 For writting off remaining premium 1.03.2015 Forward exchange premium A/c Dr. $644 To Profit and loss A/c $644Related Questions
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