Assume that your company purchases inventory from a Mexican supplier on 12/15. The invoice specifies that the payment is to be made on 3/15 for 150,000 Mexican Pesos. Your company operates on a calendar year basis.

Relevant exchange rates (1 Peso =):

12/15 - $0.040

12/31 - $0.050

3/13 - $0.060

Prepare the journal entries to record the purchase, the required adjusting entry at 12/31, and the payment on 3/15.

There were no hedges placed on this transaction. Explain whether or not a hedge would have been effective. What is the purpose of a hedge in a foreign currency transaction?

How would this situation be different if we paid in Pesos on the day of the purchase? If the purchase would have been denominated in US$ and payable on 3/15?