Question

Consider the following information:

1. On December 1, 2019, a U.S. firm plans to purchase a piece of equipment (with an asking price of 100,000 francs) in Switzerland during January of 2020. The transaction is probable, and the transaction is to be denominated in euros.
2. On December 1, 2019, the company enters into a forward contract to buy 100,000 Swiss francs for $1.01 on January 31, 2020.
3. Spot rates and the forward rates for January 31, 2020, settlement were as follows (dollars per Swiss franc):

   	Spot Rate	Forward Rate for 1/31/20
   December 1, 2019	$0.99	$1.01
   Balance sheet date (12/31/19)	$1.01	$1.02
   January 31 and February 1, 2020	$1.04

4. On February 1, the equipment was purchased for 100,000 Swiss francs.

Required:

1. Prepare all journal entries needed on December 1, December 31, January 31, and February 1 to account for the forecasted transaction, the forward contract, and the transaction to buy the equipment.
2. When should the company reclassify any amounts reported in other accumulated comprehensive income as a result of the cash flow hedge?

Answer 1

Answer:

Date	General Journal	Debit	Credit
Dec.01	FC Receivable from Exchange Dealer (100,000 × $1.01)	$     101,000
	Dollars Payable to Exchange Dealer		$      101,000
Dec.31	FC Receivable from Exchange Dealer [100,000 × ($1.01 - 1.02)]	1,000
	Foreign Exchange Gain-OCI		1,000
Jan.31	FC Receivable from Exchange Dealer [100,000 × ($1.02 - 1.04)]	2,000
	Foreign Exchange Gain-OCI		2,000
Jan.31	Investment in FC	104,000
	Dollars Payable to Exchange Dealer	101,000
	Cash		101,000
	FC Receivable from Exchange Dealer		104,000
Feb.01	Equipment	104,000
	Investment in FC		104,000