SD Corporation, a U.S. enterprise, sold a product to a customer in Ireland on Oc
ID: 2564174 • Letter: S
Question
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:
Spot Rate Forward Rate (to 4/1/2017)
October 1, 2016 $1.43 $1.40
December 31, 2016 $1.34 $1.39
April 1, 2017 $1.35
The discount factor corresponding to the company’s incremental borrowing rate for 6 months is 0.95.
Required:
1. Prepare the journal entry for the sale on October 1, 2016.
2. Assuming that SD Corporation does not hedge this transaction, calculate the amount of exchange gain or loss on December 31, 2016 and prepare all necessary journal entries.
3. Assume that SD Corporation enters into a forward contract on October 1, 2016 to sell £100,000 six months hence, on April 1, 2017. Prepare all necessary journal entries for 2017 & 2017 assuming the SD Corporation designates the forward contract as (a) a cash flow hedge (b) a fair value hedge.
Explanation / Answer
1. Journal Entry for sale of goods
Date
Particulars
Dr. Amount (in$)
Cr. Amount (in$)
01/10/2016
Accounts Receivable
TO Sales Revenue
(£100,000 x $1.43)
143,000
143,000
2. Amount of gain or loss on foreign currency transaction = (Spot Rate of 31 Dec 2016 - Spot rate on date of booking of sale) x Amount of Sale
= ($1.34 - 1.43) x £100,000 = (9,000)
Journal entry on Dec 31, 2016
Date
Particulars
Dr. Amount (in$)
Cr. Amount (in$)
31/12/2016
Loss on Foreign currency
TO Accounts Receivable
9,000
9,000
Date
Particulars
Dr. Amount (in$)
Cr. Amount (in$)
01/10/2016
Accounts Receivable
TO Sales Revenue
(£100,000 x $1.43)
143,000
143,000
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