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On October 1, 2017, Sharp Company (based in Denver, Colorado) entered into a for

ID: 2563262 • 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

Date 1 01-10-2017 Contract debtor 39000 To Obligation account 35000 To Premium account 4000 (Being entering into forward contract) 2 01-10-2017 Obligation account 35000 To Sales account 35000 (Being sales recorded) 3 31-12-2017 Premium account 3000 To Sales account 3000 (Being premium reduced as spot price is 0.38 as on 31st December) 4 31-12-2017 Loss on forward contract 1980.2 To Profit and Loss account 1980.2 (Being opportunity loss recorded) Working Forward contract if entered on 31-12-2017 41000 Less:Actual value of forward contract 39000 Loss 2000 Present Value of loss 1980.2 (2000*0.9901)

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