FAIR VALUE HEDGE

the answer posted below is WRONG it need to be cash flow hedge, not fair value.

1) On October 1, 2013, Jarvis Co. sold inventory to a customer in a foreign country, denominated in 100,000 local currency units (LCU). Collection is expected in four months. On October 1, 2013, a forward exchange contract was acquired whereby Jarvis Co. was to pay 100,000 LCU in four months (on February 1, 2014) and receive $78,000 in U.S. dollars. The spot and forward rates for the LCU were as follows: 1 342 Date Rate Description Exchange Rate October 1, 2013 Spot Rate $.83 = 1 LCU December 31, 2013 Spot Rate $.85 = 1 LCU 1-Month Forward Rate $.80 = 1 LCU February 1, 2014 Spot Rate $.86 = 1 LCU The company's borrowing rate is 12%. The present value factor for one month is 9901. Any discount or premium on the contract is amortized using the straight-line method. Assuming this is a cash flow hedge; prepare journal entries for this sales transaction and forward contract. 1/10/13 0.83 0.78 0.85 0.80 Date Spot Value Change Forward Adjustment 83.000 31/12/13 85,000 2,000 (1.980) 1/2/14 0.86 86,000 1.000 0.86 (6,020) Adjustment on 31/12/13 = [(0.80 -0.78) X 100000] X 2000 X 0.9901 = 1980 Adjustment on 1/12/14 = [(0.78 -0.86) 100000) = 8000 - 1980 = 6020 Journal Entry Date Particulars Dr. Amt. Ct. Amt. Dr. 83.000 1/10/13 Accounts Receivables To Sales 83,000 De 2,000 31/12/13Accounts Receivables To Forward exchange Gain 2.000 Dr. 1.980 31/12/13Loss on Forward Contract To Forward Contract 1.980 Dr. 1,000 1/2/14 Accounts Receivables To Forward exchange Gain 1,000 Dr. 6,020 1/2/14 Loss on Forward Contract To Forward Contract 6,020 1/2/14 Foreign Currency Dr. -86,000 To Accounts Receivables 86,000