Question

On October 1, 2017, Sharp Company (based in Denver, Colorado) entered into a forward contract to sell 230,000 rubles in four months (on January 31, 2018) and receive $119,600 in U.S. dollars. Exchange rates for the ruble follow:

Date	Spot Rate			Forward Rate (to January 31, 2018)
October 1, 2017	$	0.48		$	0.52
December 31, 2017		0.51			0.54
January 31, 2018		0.53			N/A

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.

Part 1. Prepare journal entries, assuming that Sharp entered into the forward contract as a fair value hedge of a 230,000 ruble receivable arising from a sale made on October 1, 2017. Include entries for both the sale and the forward contract.

Part 2. Prepare journal entries, assuming that Sharp entered into the forward contract as a fair value hedge of a firm commitment related to a 230,000 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.

Answer 1

Ans-Part-1- Journal Entries for both the Sale and the Forward Contract-

Date	Accounts Title and Explanation	Debit ($)	Credit ($)
2017	Accounts receivable A/c Dr.(230,000*0.48)	110,400
Oct.1	Sales A/c		110,400
	(To record entry for sale of foreign currency )
Oct.1	No journal entry required
Dec.31	Accounts Receivable A/c Dr.	6,900
	Foreign Exchange gain A/c (($0.51-0.48)*230,000)		6,900
	(To record exchange gain )
Dec.31	Loss on forward contract A/c Dr.	4554.46
	Forward Contract A/c (($0.54-$0.52)*230,000=4,600 4,600*0.9901=4554.46		4554.46
	(To record loss on forward contract)
Jan.31	Accounts Receivable A/c Dr.	4,600
	Foreign Exchange gain A/c (($0.53-$0.51)*230,0000)		4,600
	(To Record exchange gain )
Jan.31	Forward Contract A/c Dr.	2,254.46
	Gain on forward contract A/c (($0.53-$0.52)*230,000=2,300(loss) 2,300(loss)-4554.46 (recoginsed earlier now reversed)		2,254.46
	(To record gain on contract)
Jan.31	Foreign Currency A/c Dr.	121,900
	Accounts Receivable A/c (110,400+6,900+4,600)		121,900
	(To record receipt of sale)
Jan.31	Cash A/c Dr. (0.52*230,000)	119,600
	Forward Contract A/c Dr.(121,900-119,600)	2,300
	Foreign Currency A/c		121,900
	(To record settlement of the contract)

Calculating  the impact on total net income:

Particulars	Amount ($)
Sales	110,400
Foreign exchange gain (6,900+4,600)	11,500
Loss on forward contract	-4554.46
Gain on forward contract	2,254,46
Impact on net income	119,600

Ans-Part-2- Journal Entries for both firm commitment and forward contract:

Date	Accounts Title and Explanation	Debit ($)	Credit ($)
2017	No entry required
Oct.1
Oct.1	No entry required
Dec.31	Loss on forward contract A/c Dr.	4554.46
	Forward Contract A/c (($0.54-$0.52)*230,000=4,600 4,600*0.9901=		4554.46
	(To record loss on forward contract)
Dec.31	Firm commitment A/c Dr.	4554.46
	Gain on firm commitment A/c		4554.46
	(To record gain on firm commitment)
Jan.31	Forward contract A/c Dr.	2,254.46
	Gain on forward contract A/c		2,254,46
	(To record gain on forward contract)
Jan.31	Loss on firm commitment A/c Dr.	2,254.46
	Firm commitment A/c		2,254.46
	(To record gain on firm commitment)
Jan.31	Foreign currency A/c Dr.	121,900
	Sales A/c		121,900
	(To record Sales)
Jan.31	Cash A/c Dr.	119,600
	Forward Contract A/c	2,300
	Foreign currency A/c		121,900
	(To record settlement of forward contract)
Jan.31	Adjustment to net income A/c Dr. (4,554.46-2,254.46)	2,300
	Firm commitment A/c		2,300
	(To record the closing the firm commitment)

Calculating the impact of total net income:

Particulars	Amount ($)
Sales	121,900
Net loss on forward contract ($2,254.46-$4,554.46)	-2,300
Net gain on firm commitment ($4,554.46-$2,254.46)	2,300
Adjustment on net income	-2,300
Impact on total net income	119,600

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