On November 1, 2014, a U.S. company issues a purchase order to buy merchandise f
ID: 2484869 • Letter: O
Question
On November 1, 2014, a U.S. company issues a purchase order to buy merchandise for €1,000,000. The company expects to take deilvery of the merchandise on Jan 10, 2015, and will pay the supplier on March 1, 2015. To hedge its FX risk, on November 1, 2014 the company invests in a forward contract for deilvery of €1,000,000 on March 1, 2015. The company sells the merchandise to a U.S. customer for 2,000,000$ in cash on APril 1,2015. Assume the forward contract qualififes as a fair value hedge of the firm to buy merchandise.
Exchange Rates for the Euro ($/€) Are below.
REQUIRED:
For each data below, prepare the necessary journal entries to record the events and/or adjustments needed.
a) Dec 31 2014 (endof year closing)
B) Jan 10, 2015 (takes delivery of merchandise)
C) March 1, 2015 (closes the forward and pays the bill)
d) April 1, 2015 (sells the merchandise to a US Customer). Record the sales revenue and cost of goods sold on the sale
( I would appreciate if you can show me how you get the numbers with calculations, thank you )
Spot rate Forward rate for March 1, 2015 deilvery Nov 1, 2014 $1.40 $1.42 Dec 31, 2014 1.41 1.43 Jan 10, 2015 1.44 1.435 March 1, 2015 1.45 1.45Explanation / Answer
Answer.a. Dec 31.2014 Journal Entry Date Particulars Dr. Amt. Cr. Amt. Dec-31 Investment in forward Dr. 10,000 2014 To Exchange Gain 10,000 Dec-31 Exchange Loss Dr. 10,000 2014 To Firm Commitment 10,000 Rates changes from $1.42 to $1.43 Answer.b. Jan 10. 2015 Journal Entry Date Particulars Dr. Amt. Cr. Amt. Jan-10 Investment in forward Dr. 5,000 2015 To Exchange Gain 5,000 Jan-10 Exchange Loss Dr. 5,000 2015 To Firm Commitment 5,000 Rates changes from $1.43 to $1.435 Jan-10 Inventory Dr. 1,425,000 2015 Firm Commitment Dr. 15,000 To Accounts Payable 1,440,000 Answer.c. March 1. 2015 Journal Entry Date Particulars Dr. Amt. Cr. Amt. Mar-01 Exchange Loss Dr. 10,000 2015 To Accounts Payable 10,000 Rates changes from $1.44 to $1.45 Mar-01 Investment in forward Dr. 15,000 2015 To Exchange Gain 15,000 Rates changes from $1.435 to $1.45 Mar-01 Foreign Currency Dr. 1,450,000 2015 To Cash 1,420,000 To Investment in Forward 30,000 Mar-01 Accounts Payable Dr. 1,450,000 2015 To Foreign Exchange 1,450,000 Answer.d. April 1. 2015 Journal Entry Date Particulars Dr. Amt. Cr. Amt. Apr-01 Cash Dr. 2,000,000 2015 To Sales Revenue 2,000,000 Apr-01 Cost of Goods Sold Dr. 1,425,000 2015 To Inventory 1,425,000
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