X Corp., based in the US, sold inventory for 500,000 Euro to Y Co. on December 2
ID: 2584040 • Letter: X
Question
X Corp., based in the US, sold inventory for 500,000 Euro to Y Co. on December 2, 2008. The customer will pay March 1, 2009, payable in Euros. On 12/2/2008, X entered into a 90 -day forward contract to hedge the receivable from Y. The following exchange rates apply:
Required:
1. Assume the Forward was designated as a cash flow hedge and Merele’s incremental borrowing rate is 6% giving a 60- day present value factor of .9901. Give all entries related to these transactions and date the entries.
2. Assume the Forward was designated as a fair value hedge. Give all entries for these transactions and date the entries.
12/2/08 13/31/08 3/1/09 Spot Rate $1.70 1.705 1.71 Forward Rate for 3/1/09 1.68 1.69 ---Explanation / Answer
1.
Y Co. Dr
To Sales A/c
841585
Bank A/c. Dr
P&L A/c. Dr
To Y Co.
840000
1585
841585
2.
Y Co. Dr
To Sales A/c
850000
850000
Y Co. Dr
To Foreign exchange reserve
2500
2500
Y Co. Dr
To Foreign exchange reserve
Bank A/c. Dr
To Y Co.
2500
855000
2500
855000
Date Particular $ Dabit $ Credit 2 Dec 08Y Co. Dr
To Sales A/c
841585
841585 2 Dec 08Bank A/c. Dr
P&L A/c. Dr
To Y Co.
840000
1585
841585
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