Problem 2. A U.S. company purchases merchandise from a Hong Kong supplier on a r

Question

Problem 2. A U.S. company purchases merchandise from a Hong Kong supplier on a regular basis. The following events occur: October 1, 2017: The company signed a forward contract to purchase HKS1,000,000 for delivery on May 1, 2018, in anticipation of an expected payment of HKS for a forecasted merchandise purchase. December 1, 2017: The company issued a purchase order for HK$1,000,000 in merchandise from the supplier. March 1, 2018: The company took delivery of the merchandise. May 1, 2018: The company closed the forward contract and paid the supplier May 31, 2018: The company sold the merchandise to a U.S. customer for $200,000. The company's accounting year ends December 31 Exchange rates (S/HKS) are as follows: Spot rate Forward rate for delivery 5/1/2018 October 1, 2017 December 1, 2017 $0.125 0.127 December 31, 2017 0.128 0.131 0.132 S0.127 0.1285 0.131 0.1317 0.132 March 1, 2018 May 1,2018 Required: Prepare the journal entries to record the above transactions, including necessary adjusting entries. Assume the hedge qualifies for hedge accounting.

Explanation / Answer

Date Particular Debit Credit 1-Mar Purchase A/C (10,00,000 X 0.131) $    131,000.00 Foreign Exhange A/C (Balance) $            700.00 To Supplier A/C $      131,700.00 Being Material Purchased from Hong Kong Supplier 1-May Supplier A/C $    131,700.00 To Bank A/C $      131,700.00 Being Payment Made to Supplier 31-May Customer A/C $    200,000.00 To Sales A/C (10,00,000 X 0.131) $      131,000.00 To Profit on Sale A/C $        69,000.00 Being Material Sold at Profit

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