Question
In: Finance
On November 1, 2014, Moddel Company (a U.S. corporation) entered into a 90-day forward contract to...
On November 1, 2014, Moddel Company (a U.S. corporation) entered
into a 90-day forward contract to purchase 200,000 British pounds.
The purpose of the forward contract is to hedge a commitment to
purchase special equipment on January 30, 2015 from a British firm
Jeckyl, Inc. The invoice price on the purchase commitment is
denominated in British pounds. The forward contract is not settled
net. Assume Moddel uses a 12% interest rate. Use a fair value
hedge.
The relevant exchange rates are stated in dollars per pound:
Forward Rate
Spot
Rate to Jan.
30, 2012
November 1,
2014
$1.32
$1.35
December 31,
2014
$1.47
$1.50
January 30,
2015
$1.55
-
Part 1: What journal entry did Moddel
record on November 1, 2014?
Part 2: What journal entries did Moddel
record on December 31, 2014?
Part 3: What journal entries did Moddel
record on January 30, 2015 if the purchase was made?
Solutions
Expert Solution
| Part 1 | |||
| Date | Account Titles and Explanation | Debit | Credit |
| 11/01/14 | Contract receivable (pounds) | 270,000.00 | |
| Contract payable (200,000 × $1.35) | 270,000.00 | ||
| Part 2 | |||
| 12/31/14 | Contract receivable (pounds) | 30,000.00 | |
| Exchange gain 200,000 ×($1.50 - $1.35) | 30,000.00 | ||
| 12/31/14 | Exchange Loss | 30,000.00 | |
| Change in value of firm commitment in pounds 200,000 × ($1.50 - $1.35) | 30,000.00 | ||
| Part 3 | |||
| 1/30/15 | Exchange Loss | 10,000.00 | |
| Change in value of firm commitment in pounds 200,000 × ($1.55 - $1.50) | 10,000.00 | ||
| Contract receivable (pounds) | 10,000.00 | ||
| Exchange gain 200,000 ×($1.55 - $1.50) | 10,000.00 | ||
| Contract payable | 270,000.00 | ||
| Cash | 270,000.00 | ||
| Cash (pounds) (200,000 × $1.55) | 310,000.00 | ||
| Contract receivable (pounds) | 310,000.00 | ||
| Equipment | 270,000.00 | ||
| Change in value of firm commitment in pounds | 40,000.00 | ||
| Accounts payable (pounds) | 310,000.00 | ||
| Accounts payable (pounds) | 310,000.00 | ||
| Cash (Pounds) | 310,000.00 |
jeff jeffy answered 3 years agoRelated Solutions
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