Question

On October 1, 2017, Sharp Company (based in Denver, Colorado) entered into a forward contract to sell 230,000 rubles in four months (on January 31, 2018) and receive $119,600 in U.S. dollars. Exchange rates for the ruble follow:

Date	Spot Rate			Forward Rate (to January 31, 2018)
October 1, 2017	$	0.48		$	0.52
December 31, 2017		0.51			0.54
January 31, 2018		0.53			N/A

Sharp's incremental borrowing rate is 12 percent. The present value factor for one month at an annual interest rate of 12 percent (1 percent per month) is 0.9901. Sharp must close its books and prepare financial statements on December 31.

1. Prepare journal entries, assuming that Sharp entered into the forward contract as a fair value hedge of a 230,000 ruble receivable arising from a sale made on October 1, 2017. Include entries for both the sale and the forward contract.
2. Prepare journal entries, assuming that Sharp entered into the forward contract as a fair value hedge of a firm commitment related to a 230,000 ruble sale that will be made on January 31, 2018. Include entries for both the firm commitment and the forward contract. The fair value of the firm commitment is measured by referring to changes in the forward rate.

Answer 1

Part A

Date	Account titles and explanation	Debit	Credit
October 1, 2017	Accounts Receivable	110400
	Sales (230000*0.48)		110400
October 1, 2017	No journal entry required
	(to record forward contract)
December 31, 2017	Accounts Receivable (230000*(0.51-0.48))	6900
	Foreign Exchange Gain		6900
	Loss on Forward Contract	4554
	Forward Contract (230000*(0.54-0.52))*0.9901		4554
January 1, 2018	Accounts Receivable	4600
	Foreign Exchange Gain (230000*(0.53-0.51))		4600
	Forward Contract	2254
	Gain on Forward Contract ((0.53-0.52)*230000)-4554		2254
	Foreign Currency (230000*0.53)	129100
	Accounts Receivable		129100
	Cash (230000*0.48)	110400
	Forward Contract	11500
	Foreign Currency		129100

Part B

Date	Account titles and explanation	Debit	Credit
October 1, 2017	No journal entry required
	(To record the sales agreement and the forward contract as both are executory contracts
December 31, 2017	Loss on Forward Contract	4554
	Forward Contract		4554
	Firm Commitment	4554
	Gain on Firm Commitment		4554
January 31, 2018	Forward Contract	2254
	Gain on Forward Contract		2254
	Loss on Firm Commitment	2254
	Firm Commitment		2254
	Foreign Currency	129100
	Sales		129100
	Cash	110400
	Forward Contract	11500
	Foreign Currency		129100
	Adjustment to Net Income	11500
	Firm Commitment		11500