Question

# On October 1, 2018, Crusie Co. sold inventory to a customer in a foreign country, denominated...

On October 1, 2018, Crusie Co. sold inventory to a customer in a foreign country, denominated in 100,000 local currency units (LCU). Collection is expected in four months. On October 1, 2018, a forward exchange contract was acquired whereby Crusie Co. was to pay 100,000 LCU in four months (on February 1, 2019) and receive \$78,000 in U.S. dollars. The spot and forward rates for the LCU were as follows:

 Date Rate Description Exchange Rate October 1, 2018 Spot Rate \$0.83 December 31, 2018 Spot Rate \$0.85 1-month Forward Rate \$0.80 February 1, 2019 Spot Rate \$0.86

The company's borrowing rate is 12%. The present value factor for one month is .9901.
Any discount or premium on the contract is amortized using the straight-line method.

Assuming this is a cash flow hedge;

Calculate the forward rate at October 1, 2018

Prepare journal entries for this sales transaction and forward contract.

Show all work and calculations

 Date Spot Value Change Forward Adjustment 01/10/2018 0.83 83,000 0.78 31/12/2018 0.85 85,000 2,000 0.80 (1,980) 01/02/2014 0.86 86,000 1,000 0.86 (6,020) Adjustment on 31/12/13 = [(0.80 - 0.78) X 100000] X 2000 X 0.9901 = 1980 Adjustment on 1/12/14 = [(0.78 - 0.86) 100000] = 8000 - 1980 = 6020
 Journal Entry Date Particulars Dr. Amt. Cr. Amt. 01/10/2018 Accounts Receivables                  Dr. 83,000 To Sales 83,000 31/12/2018 Accounts Receivables                 Dr. 2,000 To Forward exchange Gain 2,000 31/12/2018 Loss on Forward Contract         Dr. 1,980 To Forward Contract 1,980 01/02/2019 Accounts Receivables                 Dr. 1,000 To Forward exchange Gain 1,000 01/02/2019 Loss on Forward Contract         Dr. 6,020 To Forward Contract 6,020 01/02/2019 Foreign Currency                          Dr. 86,000 To Accounts Receivables 86,000 01/02/2019 Cash                                                   Dr. 78,000 Forward Contract                         Dr. 8,000 To Foreign Currency 86,000