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#11 On October 20, 2018, our company purchased a from a company located in Luxembourg 100,000...

#11

On October 20, 2018, our company purchased a from a company located in Luxembourg 100,000 units of a product at a purchase price of €6.00 per unit. Our company is required to pay for the merchandise in Euros (€). The due date of our payment is January 20, 2019. On October 20, 2018, our company entered into a forward contract with an exchange broker to mitigate fluctuation risk. The contract obligates our company to by €600,000 on January 20, 2019 at the forward rate on October 20, 2018 for settlement on January 20, 2019. Assume this derivative qualifies as a hedge. Our company’s functional currency is the $US. Spot rates and forward rates on October 20, 2018, December 31, 2018 and January 20, 2019 are shown below.

Date

Spot Rate $US= €1

Forward Rate $US= €1 for settlement on January 20, 20X9

October 20, 20X8

1.47

1.44

December 31, 20X8

1.40

1.39

January 20, 20X9

1.37

1.37

When computing fair values, ignore discounting.

Required:

  • Prepare the journal entries related to the purchase, payable, cash and derivative as of October 20, 2018, December 31, 2018 and January 20, 2019.
  • Was this contract beneficial to our company? Explain.
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