b6-3

Forward exchange contract designated as a fair value hedge of a foreign-currency-denominated firm commitment to purchase equipment, strengthening $US

On November 5, 2018, our company enters into a firm commitment to purchase equipment for delivery on March 20, 2019, in Euros (). The price of the equipment is fixed at 525,000 with payment due on delivery. We are concerned that the $US may weaken vis--vis the Euro and, on the same date, we enter into a foreign currency forward contract with a foreign currency broker to buy 525,000 on March 20, 2019. We will pay $1.34 per 1, which is the current forward rate for settlement on March 20, 2019. We designate the foreign currency forward contract as a fair value hedge of our risk of changes in the fair value of the firm commitment resulting from changes in the $/ exchange rate. Our companys functional currency is the $US. The relevant spot and forward exchange rates during this time period are as follows:

				DerivativeForward
Date	Spot Rate ($US = 1)	Fixed Asset Purchase Transaction	Forward Ratea ($US = 1)	FV Asset (Liability)b	Change in FV
November 5, 2018	1.36		1.34
December 31, 2018	1.33		1.30	$(21,000)	$(21,000)
March 20, 2019	1.28	$(672,000)	1.28	(31,500)	(10,500)

^a For settlement on March 20, 2019

^b We ignore discounting in the computation of fair values.

a. Prepare the journal entries to record the purchase and all adjustments required for the firm commitment, forward contract, and equipment purchase at November 5, 2018, December 31, 2018, and March 20, 2019.

Note: If no entry is required, select "No entry" as your answers under Description and leave the debit and credit answers blank (zero).

Hedged Transaction

Date	Description	Debit	Credit
11/5/18	AnswerAccounts payableAccounts receivableCashCost of goods soldDepreciation expenseForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Plant and equipmentNo entry	Answer	Answer
	AnswerAccounts payableAccounts receivableCashCost of goods soldDepreciation expenseForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Plant and equipmentNo entry	Answer	Answer
12/31/18	AnswerAccounts payableAccounts receivableCashCost of goods soldDepreciation expenseForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Plant and equipmentNo entry	Answer	Answer
	AnswerAccounts payableAccounts receivableCashCost of goods soldDepreciation expenseForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Plant and equipmentNo entry	Answer	Answer
3/20/19	AnswerAccounts payableAccounts receivableCashCost of goods soldDepreciation expenseForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Plant and equipmentNo entry	Answer	Answer
	AnswerAccounts payableAccounts receivableCashCost of goods soldDepreciation expenseForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Plant and equipmentNo entry	Answer	Answer
	To record change in value.
	AnswerAccounts payableAccounts receivableCashCost of goods soldDepreciation expenseForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Plant and equipmentNo entry	Answer	Answer
	AnswerAccounts payableAccounts receivableCashCost of goods soldDepreciation expenseForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Plant and equipmentNo entry	Answer	Answer
	To record purchase of fixed assets.
	AnswerAccounts payableAccounts receivableCashCost of goods soldDepreciation expenseForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Plant and equipmentNo entry	Answer	Answer
	AnswerAccounts payableAccounts receivableCashCost of goods soldDepreciation expenseForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Plant and equipmentNo entry	Answer	Answer
	To reclassify firm commitment.

FV Hedge

Date	Description	Debit	Credit
11/5/18	AnswerAccounts payableAccounts receivableCashCost of goods soldDepreciation expenseForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Plant and equipmentNo entry	Answer	Answer
	AnswerAccounts payableAccounts receivableCashCost of goods soldDepreciation expenseForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Plant and equipmentNo entry	Answer	Answer
12/31/18	AnswerAccounts payableAccounts receivableCashCost of goods soldDepreciation expenseForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Plant and equipmentNo entry	Answer	Answer
	AnswerAccounts payableAccounts receivableCashCost of goods soldDepreciation expenseForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Plant and equipmentNo entry	Answer	Answer
3/20/19	AnswerAccounts payableAccounts receivableCashCost of goods soldDepreciation expenseForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Plant and equipmentNo entry	Answer	Answer
	AnswerAccounts payableAccounts receivableCashCost of goods soldDepreciation expenseForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Plant and equipmentNo entry	Answer	Answer
	To record change in value.
	AnswerAccounts payableAccounts receivableCashCost of goods soldDepreciation expenseForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Plant and equipmentNo entry	Answer	Answer
	AnswerAccounts payableAccounts receivableCashCost of goods soldDepreciation expenseForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Plant and equipmentNo entry	Answer	Answer
	To record the net settlement.

b. Reconcile to the forward rate at the forward contracts inception the net cash paid for both the equipment purchase and the settlement of the forward-contract derivative.

Note: Do not use a negative sign with your answer.

Net cash paid for equipment purchase and settlement of the forward contract derivative is:

$Answer