676 PROBLEM 12-2 Importing/Exporting Transactions with a Forward Contract Hedge L06 Crystal Exporting Co. is a U.S. wholesaler engaged in foreign trade. The following transac- tions are representative of its business dealings. The company uses a periodic inventory sys- tem and is on a calendar-year basis. All exchange rates are direct quotations. Dec. 1 Crystal Exporting purchased merchandise from Chang's Ltd., a Hong Kong manufac- turer. The invoice was for 210,000 Hong Kong dollars, payable on April 1. On this same date, Crystal Exporting acquired a forward contract to buy 210,000 Hong Kong dollars on April 1 for $.1314. Dec. 29 Crystal Exporting sold merchandise to Zintel Retailers for 120,000 Hong Kong dollars, receivable in 90 days. No hedging was involved. Chapter 12 Accounting for Foreign Currency Transactions and Hedging Foreign Exchange Risk April 1 Crystal Exporting received 120,000 Hong Kong dollars from Zintel Retailers. 1 Crystal Exporting submitted full payment of 210,000 Hong Kong dollars to Chang's, Ltd., after obtaining the 210,000 Hong Kong dollars on its forward contract. Spot rates and the forward rates for the Hong Kong dollar were as follows: Required: Dec. 1 Spot Rate $.1265 Dec. 29 .1240 Dec. 31 .1259 April 1 .1430 Forward Rate for April 1 Delivery $.1314 .1305 .1308 A. Prepare journal entries for the transactions including the necessary adjustments on December 31. B. Explain the income statement treatment given to any transaction gains and losses recog- nized at December 31