Problem 2. A U.S. company purchases merchandise from a Hong Kong supplier on a r
ID: 2548511 • Letter: P
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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 HKS1,000,000 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 0.127 December 31,2017 0.128 March 1, 2018 0.125 $0.127 0.1285 0.131 0.1317 0.132 May 1,201 0.131 0.132 Required: Prepare the journal entries to record the above transactions, including necessary adjusting entries. Assume the hedge qualifies for hedge accounting.Explanation / Answer
CALCULATION OF EXCHANGE LOSS=
SPOT RATE ON BALANCE SHEET DATE =.128
LESS SPOT RATE ON PAYMENT DATE= .132
=(.004)*HK1000000
FORWARD CONTRACT RATE = .127
LESS SPOT RATE ON SETTLEMENT DATE =.132
TOTAL DIFFERANCE TO BE RECIEVED= HK$1000000*.005= 5000
WE WILL NOT MAKE AN ENTRY ON DELIVERY DATE AND ON DATE OF SIGNING THE FORWARD CONTRACT AS WE ARE LIABLE TO PAY OR RIGHT TO RECEIVE THE DIFFERENCE ON SETTLEMENT DATE.
AMOUNT IN $ DATE TITLES AND TRANSACTIONS DEBIT CREDIT DEC, 1 PURCHASE 127000 ACCOUNTS PAYABLE 127000 (WE WILL RECORD THE ISSUE OF PURCHASE ORDER WITH SPOT RATE I.E. HK1000000*.127 DEC,31 FOREIGN EXCHANGE LOSS 1000 ACCOUNTS PAYABLE 1000 (WE WILL ALSO RECOGNISE INCREASE IN VALUE OF ACCOUNTS PAYABLE AS ON BALANCE SHEET DATE I.E.(.128-.127)*1000000 MAY,1 ACCOUNTS PAYABLE 128000 FORIEGN EXCHANGE LOSS 4000 CASH/BANK 132000CALCULATION OF EXCHANGE LOSS=
SPOT RATE ON BALANCE SHEET DATE =.128
LESS SPOT RATE ON PAYMENT DATE= .132
=(.004)*HK1000000
MAY, 1 CASH 5000 FOREIGN EXCHANGE/HEDGING GAIN 5000 BEING FORWARD CONTRACT SETTLED WITH DIFFERENCE AMOUNTFORWARD CONTRACT RATE = .127
LESS SPOT RATE ON SETTLEMENT DATE =.132
TOTAL DIFFERANCE TO BE RECIEVED= HK$1000000*.005= 5000
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