Question

On October 1, Year 6, Wheeling Company contracted to sell merchandise to a customer in Switzerland at a selling price of CHF422,000. The contract called for the merchandise to be delivered to the customer on January 31, Year 7, with payment due on delivery. On October 1, Year 6, Wheeling arranged a forward contract to deliver CHF422,000 on January 31, Year 7, at a rate of CHF1 = $1.23. Wheeling's’s year-end is December 31.

The merchandise was delivered on January 31, Year 7, and CHF422,000 were received and delivered to the bank.

Exchange rates were as follows:

	Spot Rates	Forward Rates**
October 1, Year 6	CHF1 = $1.21	CHF1 = $1.23
December 31, Year 6	CHF1 = $1.24	CHF1 = $1.25
January 31, Year 7	CHF1 = $1.22	CHF1 = $1.22

**For contracts expiring on January 31, Year 7.

Required:

(a) Prepare the journal entries (using net method) that Wheeling should make to record the events described assuming that the forward contract is designated as a cash flow hedge. For Exchange Gains/Losses - OCI account, just use OCI, and the credit or debit will determine if it is a gain/loss

(b) Prepare a partial trial balance of the accounts used as at December 31, Year 6

(c) Prepare the journal entries (using net method) that Wheeling should make to record the events described, assuming that the forward contract is designated as a fair value hedge.

(d) Prepare a partial trial balance of the accounts used as at December 31, Year 6.

Answer 1

Quesion: 1

The journal entries (using net method) that Wheeling should make to record the events described assuming that the forward contract is designated as a cash flow hedge. For Exchange Gains/Losses - OCI account, just use OCI, and the credit or debit will determine if it is a gain/loss

Date	Account titles and explanation	Debit	Credit
October 1, Year 6	Receivable from bank	519,060
	Forward contract (Payable from bank) (422000*1.23)		519,060
	(Record the forward contract)
December 31, Year 6	Other comprehensive income	8,440
	Forward contract (Payable from bank) (422000*(1.25-1.23))		8440
	(Record the exchange loss and income)
January 31, Year 7	Cash	514,840
	Sales (422000*1.22)		514,840
	(Record the sales)
	Forward contract (Payable from bank)	12,660
	Other comprehensive income (422000*(1.25-1.22))		12,660
	(Record the exchange gain and income)
	Other comprehensive income	4,220
	Sales (519,060-514,840)		4,220
	(Record the other comprehensive income)
	Forward contract (Payable from bank)	514,840
	Cash	4,220
	Receivable from bank		519,060
	(Record the receipts of cash from bank)

Quesion: 2

Partial trial balance of the accounts used as at December 31, Year 6

Accounts	Debit	Credit
Forward contract liability		8,440
Other comprehensive income		8,440

Only a 8,440 current liability is reported under the cash flow hedge.

Quesion:3

The journal entries (using net method) that Wheeling should make to record the events described, assuming that the forward contract is designated as a fair value hedge.

Date	Account titles and explanation	Debit	Credit
October 1, Year 6	Receivable from bank	519,060
	Forward contract (Payable from bank) (422000*1.23)		519,060
	(Record the forward contract)
December 31, Year 6	Exchange loss	8,440
	Forward contract (Payable from bank) (422000*(1.25-1.23))		8440
	(Record the exchange loss and income)
	Commitment receivable	8440
	Exchange gain		8440
	(Record the exchange gain)
January 31, Year 7	Cash	514,840
	Sales (422000*1.22)		514,840
	(Record the sales)
	Forward contract (Payable from bank)	8,440
	Exchange gain (422000*(1.25-1.23))		8,440
	(Record the exchange gain and income)
	Exchange loss	8,440
	Commitment receivable		8,440
	(Record the exchange loss)
	Commitment receivable	4,220
	Sales (519,060-514,840)		4,220
	(Record the adjustment of other comprehensive income)
	Forward contract (Payable from bank)	514,840
	Cash	4,220	4,220
	Receivable from bank		514,840
	(Record the receipts of cash from bank)

Quesion:4

Trial balance, December 31, Year 6

Accounts	Debit	Credit
Commitment receivable	8,440
Forward contract liability		8,440

Under the fair value hedge, a current asset and current liability of 8,440 are reported.