Question

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

Answer 1

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