Problem 1 Hedging Instrument – Forward Contract

(1) Provide all journal entries relative to the 11/1, Y1 No entry.

problem above.

Hedged Item
12/31, Y1 Forward Contract (Asset) 20,600
11/1, Y1 Accounts Receivable 5,588,100
Gain on Forward Contract 20,600
Sales 5,588,100
[(55.202-55.408)*100,000]
(100,000*55.881sr)

4/30, Y2 Cash – LCU 5,540,800*

12/31, Y1 FOREX Loss 47,300
Cash – FCU 5,432,900**
Accounts Receivable 47,300
Forward Contract (Asset) 20,600
[(55.408-55.881sr)*100000]
Gain on Forward Contract 87,300

*(100,000*55.408fr)
4/30, Y2 Cash – FCU 5,432,900*
**(100,000854.329current rate)
FOREX Loss 107,900

Accounts Receivable 5,540,800**

(2) Impact on Net Income on Y1
*(100,000*54.329sr)
Hedged Item (47,300) loss
**(100,000*55.408fr)
Hedging Instrument 20,600 gain

Difference on Gain/Loss (26,700) loss

(3) Impact on Net Income on Y2

Hedged Item (107,900) loss

Hedging Instrument 87,300 gain

Difference on Gain/Loss (20,600) loss

Problem 2 Hedging Instrument – Forward Contract

Hedged Item – Firm Purchase Commitment 8/1 No entry.

8/1 No entry.

9/30 Forward Contract (Asset) 68,074.95

9/30 Loss on Firm Commitment 68,074.95 Gain on Forward Contract 68,074.95

Firm Commitment (Liability) 68,074.95

{[(7.7525-7.8208)*1,000,000]*1.02^-(2/12)} 10/31 Cash – FCU 7,891,400*

Cash – LCU 7,752,500**

10/31 Inventory 7,891,400* Forward Contract (Asset) 68,074.95

Firm Commitment (Liability) 68,074.95 Gain on Forward Contract 70,825.05

Cash 7,752,500 *(1,000,000*7.8914current fr)

Gain on Firm Commitment 206,974.95 **(1,000,000*7.7525fr)

*(1,000,000*7.8914current fr)

**(1,000,000*7.7525fr) Net Cash Settlement

Cash 138,900*

Forward Contract (Asset) 68,074.95

Gain on Forward Contract 70,825.05

*[(7.7525-7.8914)*1,000,000]