Question

In: Accounting

Problem 5. On November 1, 2017, US Pelican Company entered into a 90 day forward contract...

Problem 5. On November 1, 2017, US Pelican Company entered into a 90 day forward contract of £200,000 pounds to hedge a commitment to purchase special equipment on February 1, 2018 from a British firm Raven Inc. Assume Pelican uses a 12% interest rate.

The relevant exchange rates are of dollars per pound:

Spot Rate

Forward Rate (for Feb 1, 2018)

November 1, 2017

$1.32

$1.35

December 31, 2017

1.47

1.50

February 1, 2018

1.55

-

Instructions

1. What journal entry did Pelican record on November 1, 2017?

2. What journal entry did Pelican record on December 31, 2017?

3. What journal entry did Pelican record on February 1, 2018 if the purchase was made?

4. If this is a “forecasted transaction”, what journal entry did Pelican record on November 1, 2017, on December 31, 2017, and on February 1, 2018 if the purchase was made?

Solutions

Expert Solution

ANSWER

Part 1
Date Account Titles and Explanation Debit Credit
11/01/17 Contract receivable (pounds) 270,000.00
Contract payable (200,000 × $1.35) 270,000.00
Part 2
12/31/17 Contract receivable (pounds) 30,000.00
Exchange gain 200,000 ×($1.50 - $1.35) 30,000.00
12/31/17 Exchange Loss 30,000.00
Change in value of firm commitment in pounds 200,000 × ($1.50 - $1.35) 30,000.00
Part 3
2/1/18 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

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