b) Imperial Corp., a U.S. corporation, entered into a contract on November 1, 2013, to sell two machines to Crown Company, for 95,000 foreign currency units (FCU). The machines were to be delivered and the amount collected on March 1, 2014. In order to hedge its commitment, Imperial entered into a forward contract for 95,000 FCU delivery on March 1, 2014. The forward contract met all conditions for hedging an identifiable foreign currency commitment.
Selected exchange rates for FCU at various dates were as follows:
November 1, 2013 – Spot rate $1.3076
Forward rate for delivery on March 1, 2014 1.2980
December 31, 2013 – Spot rate 1.3060
Forward rate for delivery on March 1, 2014 1.3150
March 1, 2014 – Spot rate 1.2972
Required:
Prepare all journal entries relative to the above on the books of Imperial Corp. on the following dates:
1. November 1, 2013.
2. Year-end adjustments on December 31, 2013.
3. March 1, 2014. (Include all adjustments related to the forward contract.
Entry on 1st November 2013
Crown company A/c ...Dr. $124,222
To Sales A/c. $124,222
(Being 2 machines sold at 95,000 FCU having exchange rate of 1FCU= 1.3076)
Entry on 31st December, 2013
Loss on foreign exchange A/c... Dr. $152
To crown company A/c. $152
(Being debtor revalued at the exchange rate of 1FCU =$1.3060)
Loss on foreign exchange A/c... Dr. $1,615
To Forward contract A/c. $1,615
(Being forward exchange loss recognised)
Profit and loss A/c ... Dr. $1,767
To loss on foreign exchange A/c $1,767
(Being foreign exchange loss transferred to profit and loss)
Entry on March 1,2014
Cash A/c... Dr. $123,234
Foreign exchangeA/c ...Dr. $836
To crown company A/c $124,070
(Beingcash realised)
Cash A/c ... Dr. $76
Forward contract A/c... Dr. $ 1,615
To exchange gain on foreign exchange A/c $1,691
(Being forward contract terminated at 1FCU=1.2972)
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