On November 1. 20X6. Smith Imports Inc. contracted to purchase teacups from England for 30,000 pounds (). The teacups were to be delivered on January 30, 20X7, and payment would be due on March 1, 20X7. On November 1, 20X6. Smith Imports entered into a 120-day forward contract to receive 30,000 pounds at a forward rate of 1 = $1.59. The forward contract was acquired to hedge the financial component of the foreign currency commitment. Additional information and data for the exchange rate is: 1. Assume the company uses the forward rate in measuring the forward exchange contract and for measuring hedge effectiveness. 2. Spot and exchange rates are:

\section*{Required}

a. What is Smith's net exposure to changes in the exchange rate of pounds for dollars between November 1. 20X6, and March 1.20X7?

b. Prepare all journal entries from November 1, 20X6, through March 1, 20X7, for the purchase of the subassemblies, the forward exchange contract, and the foreign currency transaction. Assume Smith's fiscal year ends on December 31, 20X6.
Requirement

c. requires information from Appendix 11A.

c. Assume interest is significant and the time value of money is considered in valuing the forward contract and hedged commitment. Use a 12 percent annual interest rate. Prepare all journal entries from November 1, 20X6, through March 1, 20X7, for the purchase of the subassemblies, the forward exchange contract, and the foreign currency transaction. Assume Smith's fiscal yearends on December 31, \(20 \times 7\).

Transcribed Image Text:

Date Spot Rate November 1. 20X6 1 = $1.61 Forward Rate for March 1, 20X7 1 = $1.59 December 31, 20X6 1 = 1.65 1 = 1.62 January 30, 20X7 1 = 1.59 1 = 1.60 March 1, 20X7 11.585