Question

•On 12/1/17, Balloon Co., a U.S. balloon manufacturer sells balloons to Maison Rue., a french company, for 20,000 Euro’s (€) on credit. Payment is due in 90 days (March 1, 2018). The current exchange rate is $1.2700 = 1 €. Balloon Co buys a 90-day forward contract to pay 20,000 €. Balloon contracts for the 90-day forward rate on 12/1/17 of $1.2500 = 1 €. On 12/31/17, spot rate is $1.2650 = 1 € and available forward rate to March 1, 2018 is $1.2520 = 1 €. Balloon uses a 6% discount rate. The 3/1/18 exchange rate is $1.2540 = 1 €. Using Fair Value Hedge method, prepare Balloon Co.’s all journal entries for 12/1/17, 12/31/17, and 3/1/18.

I understand the journal entry parts but I am just stuck on the present value part where the loss/gain for the future contract. please help!

Answer 1

Date	Accounts Titles and Explanation	Debit	Credit
Dec 1, 2017	Accounts Receivable	$25,400
	Sales		$25,400
	(€ 20,000 x 1.2700 = $25,400)
	No Entry
	(This is an executory contract)
Dec 31, 2017	Foreign Exchange Loss	$100
	Accounts Receivable		$100
	(€ 20,000 x 1.2650 = $25,300, $25,400 - $25,300 = $100 )
Dec 31, 2017	Loss on Forward Contract	$39.41
	Forward Contract		$39.41
	at 90 days rate = € 20,000 x 1.2520 = $25,040
	at current contract rate = € 20,000 x 1.2500 = $25,000
	Pv factor = 0.9852
March 1, 2018	Foreign Exchange Loss	$220
	Accounts Receivable		$220
	€ 20,000 x 1.2540 = $25,080
	$25,300 - $25,080 = $220
March 1, 2018	Loss on Forward Contract	$40.59
	Forward Contract		$40.59
	at spot rate = $25,080
	at current contract rate = $25,000
	Forward Contract on 12/31 = $39.41
March 1, 2018	Foreign Currency	$25,080
	Accounts Receivable		$25,400
March 1, 2018	Cash	25,000
	Forward Contract	$80
	Foreign Currency		$25,080