Part 2 10 points SD Corporation, a U.S. enterprise, sold a product to a customer

Question

Part 2 10 points SD Corporation, a U.S. enterprise, sold a product to a customer in Ireland on October 1, 2016 for £100,000 with payment required on April 1, 2017. Relevant exchange rates are: October 1, 2016 December 31,2016 April 1, 2017 Spot Rate S1.43 S1.34 S1.35 Forward Rate (to 4/1/2017 S1.40 $1.39 The discount factor corresponding to the company's incremental borrowing rate for 6 months is 0.95 Required: 1. Prepare the joumal entry for the sale on October 1, 2016. 2. Assuming that SD Corporation does not hedge this transaction, calculate the amount of exchange gain or loss on December 31,2016 and prepare all necessary journal entries. 3. Assume that SD Corporation enters into a forward contract on October 1, 2016 to sell £100,000 six months hence, on April 1, 2017. Prepare all necessary journal entries for 2017&2017 assuming the SD Corporation designates the forward contract as (a) a cash flow hedge (b) a fair value hedge

Explanation / Answer

1. Journal Entry on Oct 1 ( Cash Sales)

Cash Dr ................. 1,43,000

            Sales ..............................1,43,000

2. Loss of $ 3000 ( 1,00,000 * 1.43 - 1,00,000 *1.40)

3. SD Corporation should report the forward contract on its December 31, 20X6 Fnancial statements as           Asset of $ 950 ( 1,00,000 * 0.95 %)

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