Consider the following information:

1. On December 1, 2011, a U.S. firm plans to sell a piece of equipment [with an asking price of 200,000 units of a foreign currency (FC)] during January of 2012. The transaction is probable, and the transaction is to be denominated in euros.

2. The company enters into a forward contract on December 1, 2011 to sell 200,000 FC on February 1, 2012, for $1.02.

3. Spot rates and the forward rates for January 31, 2012, settlement were as follows (dollars per euro):

4. On January 31, the equipment was sold for 200,000 FC. The cost of the equipment was $170,000.

Required:

A. Prepare all journal entries needed on December 1, December 31, January 31, and February 1 to account for the forecasted transaction, the forward contract, and the transaction to sell the equipment.

B. Prepare any entry needed on February 1 to reclassify amounts from other accumulated comprehensive income into earnings.

Transcribed Image Text:

Forward Rate for 2/1/12 Spot Rate December 1, 2011 Balance sheet date (12/31/11) $1.02 $1.04 $1.01 $1.00 January 31 and February 1, 2012 $0.99