Forward exchange contract designated as a fair value hedge of foreign currency risk in a foreign-currency-denominated available-for-sale debt security, weakening $US

On November 1, 2018, our company purchased a foreign-currency-denominated AFS debt security for 700,000. Our company plans to sell the security in three months (i.e., on January 31). The spot rate on the date the security is purchased is $1.30:1 and the company is concerned about the prospect of a strengthening $US that will reduce the $US fair value of the foreign-currency-denominated security. To hedge this risk, the company purchases a forward contract to sell 700,000 for $1.33:1 (the current forward rate) on January 31, 2019. Our U.S.-based companys functional currency is the $US. The spot and forward exchange rates and their effects on the recorded values of AFS security and the forward-contract derivative are summarized in the following table:

		FC AFS Security			DerivativeForward
Date	Spot Rate ($US = 1)	Carrying Value	Change in Carry Val.	Forward Ratea ($US = 1)	FV Asset (Liability)b	Change in FV
November 1, 2018	1.30	$910,000		1.33
December 31, 2018	1.32	924,000	$14,000	1.34	$(7,000)	$(7,000)
January 31, 2019	1.35	945,000	21,000	1.35	(14,000)	(7,000)

^a For settlement on January 31, 2019

^b Ignore discounting in the computation of fair values.

a. Prepare the journal entries to record the purchase and all adjustments required for the AFS security and the forward contract at November 1, 2018, December 31, 2018, and January 31, 2019.

Hedged Transaction

Date	Description	Debit	Credit
11/1/18	AnswerAccounts payableAccounts receivableCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecuritySalesNo entry	Answer	Answer
	AnswerAccounts payableAccounts receivableCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecuritySalesNo entry	Answer	Answer
12/31/18	AnswerAccounts payableAccounts receivableCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecuritySalesNo entry	Answer	Answer
	AnswerAccounts payableAccounts receivableCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecuritySalesNo entry	Answer	Answer
1/31/19	AnswerAccounts payableAccounts receivableCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecuritySalesNo entry	Answer	Answer
	AnswerAccounts payableAccounts receivableCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecuritySalesNo entry	Answer	Answer
	To record change in $US value.
	AnswerAccounts payableAccounts receivableCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecuritySalesNo entry	Answer	Answer
	AnswerAccounts payableAccounts receivableCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecuritySalesNo entry	Answer	Answer
	To record receipt.

FV Hedge

Date	Description	Debit	Credit
11/1/18	AnswerAccounts payableAccounts receivableCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecuritySalesNo entry	Answer	Answer
	AnswerAccounts payableAccounts receivableCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecuritySalesNo entry	Answer	Answer
12/31/18	AnswerAccounts payableAccounts receivableCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecuritySalesNo entry	Answer	Answer
	AnswerAccounts payableAccounts receivableCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecuritySalesNo entry	Answer	Answer
1/31/19	AnswerAccounts payableAccounts receivableCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecuritySalesNo entry	Answer	Answer
	AnswerAccounts payableAccounts receivableCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecuritySalesNo entry	Answer	Answer
	To record change in value.
	AnswerAccounts payableAccounts receivableCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecuritySalesNo entry	Answer	Answer
	AnswerAccounts payableAccounts receivableCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecuritySalesNo entry	Answer	Answer
	To record the net settlement.

b. Reconcile to the forward rate at the forward contracts inception the net cash received for both the sale of the AFS security and the settlement of the forward-contract derivative.

Net cash received for sale of the AFS security and settlement of the forward contract derivative is:

$Answer