On November 1, 2015, Ambrose Company sold merchandise to a foreign customer for

Question

On November 1, 2015, Ambrose Company sold merchandise to a foreign customer for 240,000 FCUs with payment to be received on April 30, 2016. At the date of sale, Ambrose entered into a six-month forward contract to sell 240,000 LCUs. It properly designates the forward contract as a cash flow hedge of a foreign currency receivable. The following exchange rates apply: Forward Rate (to April 30, 2016) Date November 1, 2015 December 31, 2015 April 30, 2016 Spot Rate $0.65 0.62 0.61 $0.64 0.60 N/A Ambrose's incremental borrowing rate is 12 percent. The present value factor for four months at an annual interest rate of 12 percent (1 percent per month) is 0.9610. a. Prepare all journal entries, including December 31 adjusting entries, to record the sale and forward contract. (Do not round intermediate calculations. If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your fa answers to 2 decimal places.)

Explanation / Answer

Dec 31, 2015

Present value of derivative loss recorded ( 2400+ 4800) X 0.9610

Net Income for 2015 falls by 6,919 due to adverse exchange rate movement

There will be no impact on 2016 income as contract will be settled at SPOT rate.

Actual Exchange Rate Hedged exchange Rate Loss Amount 0.65 0.64 -0.01                                          (2,400) 0.62 0.6 -0.02                                          (4,800)

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