200,000 with payment to be made in FC on March 1, Year 2. On November 1, Year 1. Slava Company (a U.S. based company) purchased merchandise from a fore At the date of purchase, Slava Company entered into a four-month forward contract tot 200,000 Relevant exchange rates for the FC are: Forward Rate (to Date Spot rate March 1, Y2) November 1, Year 1 $24.00 $26.00 December 31, Year: $23.00 $24.00 March 1, Year 2 $22.00 Slava Company's incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12% (1% per month) is 0.98. Required: 1. Complete the schedule below: Accounts Receivable /Payable Forward Contract Forward Date Spot Rate Rate to US$ value Change in USS 01/03/Y2 Change in Fair Value value Fair Value 2. The forward contract is properly designated as a cash flow hedge of foreign currency payable/receivable (depending on what you have). Answer the questions below. Support your answer by computations. 2.1. How the forward contract will be reported on December 31 Year 1 Balance Sheet: as an asset or as a liability? Explain. 2.2. What is the fair value of the forward contract on December 31, Year 1? Show computation. 2.3. What is the fair value of the forward contract on March 1, Year 2? Show computation. , . 2.4. How the difference between spot and forward rates on November 1, Year 1 should be accounted for (as a premium/discount, and an expense/revenue) and what is the total amount? Provide computations. 3. The forward contract is properly designated as a fair value hedge of foreign currency payable or receivable (depending on what you have: AP or AR). 3.1. Prepare all journal entries, including December 31, Year 1 adjusting entries, to record the purchase or sale (depending on what you have: AP or AR) and the forward contract. $22.00 per 1 FCU. 4. All the information is the same, except that instead of forward contract the company purchased option with a strike price Should the company exercise the option on 1/03/Y2? Explain. 200,000 with payment to be made in FC on March 1, Year 2. On November 1, Year 1. Slava Company (a U.S. based company) purchased merchandise from a fore At the date of purchase, Slava Company entered into a four-month forward contract tot 200,000 Relevant exchange rates for the FC are: Forward Rate (to Date Spot rate March 1, Y2) November 1, Year 1 $24.00 $26.00 December 31, Year: $23.00 $24.00 March 1, Year 2 $22.00 Slava Company's incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12% (1% per month) is 0.98. Required: 1. Complete the schedule below: Accounts Receivable /Payable Forward Contract Forward Date Spot Rate Rate to US$ value Change in USS 01/03/Y2 Change in Fair Value value Fair Value 2. The forward contract is properly designated as a cash flow hedge of foreign currency payable/receivable (depending on what you have). Answer the questions below. Support your answer by computations. 2.1. How the forward contract will be reported on December 31 Year 1 Balance Sheet: as an asset or as a liability? Explain. 2.2. What is the fair value of the forward contract on December 31, Year 1? Show computation. 2.3. What is the fair value of the forward contract on March 1, Year 2? Show computation. , . 2.4. How the difference between spot and forward rates on November 1, Year 1 should be accounted for (as a premium/discount, and an expense/revenue) and what is the total amount? Provide computations. 3. The forward contract is properly designated as a fair value hedge of foreign currency payable or receivable (depending on what you have: AP or AR). 3.1. Prepare all journal entries, including December 31, Year 1 adjusting entries, to record the purchase or sale (depending on what you have: AP or AR) and the forward contract. $22.00 per 1 FCU. 4. All the information is the same, except that instead of forward contract the company purchased option with a strike price Should the company exercise the option on 1/03/Y2? Explain
