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Consider the following information: On December 1, 2019, a U.S. firm plans to purchase a piece of equipment (with an asking price of 100,000 francs)
Consider the following information:
- On December 1, 2019, a U.S. firm plans to purchase a piece of equipment (with an asking price of 100,000 francs) in Switzerland during January of 2020. The transaction is probable, and the transaction is to be denominated in euros.
- On December 1, 2019, the company enters into a forward contract to buy 100,000 Swiss francs for $1.01 on January 31, 2020.
- Spot rates and the forward rates for January 31, 2020, settlement were as follows (dollars per Swiss franc):
Spot Rate Forward Rate for 1/31/20 December 1, 2019 $0.99 $1.01 Balance sheet date (12/31/19) $1.01 $1.02 January 31 and February 1, 2020 $1.04 - On February 1, the equipment was purchased for 100,000 Swiss francs.
Required:
- 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 buy the equipment.
- When should the company reclassify any amounts reported in other accumulated comprehensive income as a result of the cash flow hedge?
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