Question
In: Accounting
On May 1, Year 1, KLM orders equipment from a supplier in Luxemburg for €100,000 with...
On May 1, Year 1, KLM orders equipment from a supplier in Luxemburg for €100,000 with delivery scheduled for October 1, Year 1. Payment is due on December 31, Year 1. On May 2, Year 1 KLM enters into an 8-month forward contract with its bank at a rate of €1 = $1.38 to purchase €100,000 on December 31, Year 1, the date the accounts payable is due. The equipment is delivered on October 1, Year 1, and immediately put into use. The forward contract and the payable to the supplier are settled on December 31, Year 1.
Exchange rates for one euro for Year 1 were as follows:
Spot RateForward Rate* May 1 and 2, Year 1 $1.35 $1.38 October 1, Year 1 $1.37 $1.39 December 31, Year 1 $1.36 $1.36
Required Prepare journal entries to reflect the above transactions from May 1 to December 31, Year 1, excluding adjusting entry for depreciation expense. Assume that KLM designates the forward contract as a cash-flow hedge and clears the cumulative other comprehensive income account when the equipment is delivered on October 1, Year 1
Solutions
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