Question

On November 10, 2009, King Co. sold inventory to a customer in a foreign country. King agreed to accept local currency units (LCU) in full payment for this inventory. Payment was to be made on Feb 1, 2010. On December 1, 2009, King entered into a forward contract wherein the total payment to be received would be delivered to a currency broker in two months. Additional information is as follows:

Total payment in local currency units (LCU) for the inventory: 120,000

Date Rate Description Exchange Rate per LCU

Nov. 10, 2009 Spot Rate $0.28

Dec. 1, 2009 Spot Rate $0.30

2-Month Forward Rate $0.32

Dec. 31, 2009 Spot Rate $0.34

1-Month Forward Rate $0.36

Feb. 1, 2010 Spot Rate $0.38

The present value factor for one month based on the company's borrowing rate is 0.9901

Assume this hedge is designated as a cash flow hedge, what items relating to this transaction should the company report on its 2009 and 2010 financial statements? Please prepare journal entries and show what items (account name and dollar amounts) related to the export sale and forward contract the company will report on its 2009 and 2010 financial statements.

Answer 1

Accounting for Foreign transaction :

Initially the foreign transactions are to be recorded at the rate on the date of transaction

JE: foreign currency receivable A/c -Dr 33600$

To sales A/c. 33600$.

If the forward contract is not entered the transaction at the end of the year must be reported at the rate on the last day of the balancesheet.

But in these case the company has entered into a forward contract withe the broker forward contract rate on dec1st for 2months @0.32$

120000LCU * 0.32$ 38400$

Foreigncurrency receivable A/c -Dr 4800$

To Revaluation reserve A/c 4800$

At the end of year transaction must be reported at forward purchase rate any profit or loss shall be transferred to profit or loss a/c

In 2010:

On Feb 1 amount received from foreign currency

Local currency units 120000units

The amount recorded are 38400$

But the spot rate on Feb1 are 0.38$

But the forward contract are 0.32$

The loss of 0.06$ are to be transferred to profit or loss A/c

Cash/ bank A/c -Dr 38400$

To foreign currency receivable 38400$