On October 1, 2017, Sharp Company (based in Denver, Colorado) entered into a for
ID: 2530153 • Letter: O
Question
On October 1, 2017, Sharp Company (based in Denver, Colorado) entered into a forward contract to sell 100,000 rubles in four months (on January 31, 2018) and receive $39,000 in U.S. dollars. Exchange rates for the ruble follow:
Sharp's incremental borrowing rate is 12 percent. The present value factor for one month at an annual interest rate of 12 percent (1 percent per month) is 0.9901. Sharp must close its books and prepare financial statements on December 31.
Prepare journal entries, assuming that Sharp entered into the forward contract as a fair value hedge of a 100,000 ruble receivable arising from a sale made on October 1, 2017. Include entries for both the sale and the forward contract.
Prepare journal entries, assuming that Sharp entered into the forward contract as a fair value hedge of a firm commitment related to a 100,000 ruble sale that will be made on January 31, 2018. Include entries for both the firm commitment and the forward contract. The fair value of the firm commitment is measured by referring to changes in the forward rate.
Date Spot Rate Forward Rate(to January 31, 2018) October 1, 2017 $ 0.35 $ 0.39 December 31, 2017 0.38 0.41 January 31, 2018 0.40 N/A
Explanation / Answer
1. Journal Entry for Forward Contract hedge
Date
Particulars
Debit($)
Credit($)
1-Oct
Accounts receivable
35000
To Sales ( 100,000 x 0.35)
35000
There is no formal entry for the forward contract.
31-Dec
Accounts Receivable
3000
To Foreign Exchange gain
(($.38-$.35) x 100,000)
3000
Loss on forward contract
1980.20
To Forward Contract
(($.41-$.39) x 100,000)=2,000
2000 x 0.9901=1980.20
1980.20
31-Jan
Accounts Receivable (LCU)
2000
To Foreign Exchange gain
(($.40-$.38) x 100000)
2000
Forward Contract
980.2
To Gain on forward contract
(($0.40-$0.39)x100000=1000(loss)
1000(loss)-1980.2(recognized earlier now reversed)
980.2
Foreign Currency
40000
To Accounts receivable(35000+3000+2000)
40000
Cash
39000
Forward Contract
1000
To Foreign Currency (LCU)
40000
2. Journal Entry for Forward Contract hedge of a firm commitment
Date
Particulars
Debit($)
Credit($)
1-Oct
There is no formal entry for the forward contract or firm commitment
31-Dec
Loss on forward contract
1980.20
To Forward Contract
(($.41-$.39) x 100,000) x 0.9901=1,980.20
1980.20
Firm Commitment
1980.20
To Gain on firm Commitment
(($.41-$.39) x 100,000) x 0.9901=1,980.20
1980.20
31-Jan
Forward Contract
980.2
To Gain on forward contract
(($0.40-$0.39)x100000=1000(loss
1000(loss)-1980.2(recognized earlier now reversed)
980.2
Loss on firm commitment
980.2
To Firm Commitment
980.2
Foreign Currency
40000
To Sales
40000
Cash
39000
Forward Contract
1000
To Foreign Currency
40000
Sales
1000
To Firm Commitment
1000
Date
Particulars
Debit($)
Credit($)
1-Oct
Accounts receivable
35000
To Sales ( 100,000 x 0.35)
35000
There is no formal entry for the forward contract.
31-Dec
Accounts Receivable
3000
To Foreign Exchange gain
(($.38-$.35) x 100,000)
3000
Loss on forward contract
1980.20
To Forward Contract
(($.41-$.39) x 100,000)=2,000
2000 x 0.9901=1980.20
1980.20
31-Jan
Accounts Receivable (LCU)
2000
To Foreign Exchange gain
(($.40-$.38) x 100000)
2000
Forward Contract
980.2
To Gain on forward contract
(($0.40-$0.39)x100000=1000(loss)
1000(loss)-1980.2(recognized earlier now reversed)
980.2
Foreign Currency
40000
To Accounts receivable(35000+3000+2000)
40000
Cash
39000
Forward Contract
1000
To Foreign Currency (LCU)
40000
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.