Hedging Exposed Liability Position with Adjusting Entries

On December 1, 2020, Sizzler Foods, a U.S. company, purchased merchandise from a Hong Kong supplier at a price of HK$10,000,000, payable in three months in Hong Kong dollars. To hedge its exposed liability position, Sizzler entered a forward contract for purchase of HK$10,000,000 on March 1, 2021. On March 1, Sizzler closed the forward contract and used the Hong Kong dollars to pay its supplier. Sizzlers accounting year ends January 31.

Exchange rates ($/HK$) are as follows:

	Spot rate		Forward rate for delivery March 1, 2021
December 1, 2020	$0.1289		$0.1293
January 31, 2021	0.1299		0.1304
March 1, 2021	0.1303		--

Required

Prepare the journal entries Sizzler Foods made on December 1, 2020 and March 1, 2021 to record the above transactions, as well as its end-of-year adjusting entries on January 31, 2021.

General Journal
Date	Description	Debit	Credit
12/01/20	AnswerInvestment in forward contractInventoryAccounts payableExchange lossExchange gainForeign currency	Answer	Answer
	AnswerInvestment in forward contractInventoryAccounts payableExchange lossExchange gainForeign currency	Answer	Answer
	To record goods purchased.
01/31/21	AnswerInvestment in forward contractInventoryAccounts payableExchange lossExchange gainForeign currency	Answer	Answer
	AnswerInvestment in forward contractInventoryAccounts payableExchange lossExchange gainForeign currency	Answer	Answer
	To restate forward contract to current fair value.
	AnswerInvestment in forward contractInventoryAccounts payableExchange lossExchange gainForeign currency	Answer	Answer
	AnswerInvestment in forward contractInventoryAccounts payableExchange lossExchange gainForeign currency	Answer	Answer
	To restate forward contract to current fair value.
03/01/21	AnswerInvestment in forward contractInventoryAccounts payableExchange lossExchange gainForeign currency	Answer	Answer
	AnswerInvestment in forward contractInventoryAccounts payableExchange lossExchange gainForeign currency	Answer	Answer
	To restate payable at current spot rate.
	AnswerInvestment in forward contractInventoryAccounts payableExchange lossExchange gainForeign currency	Answer	Answer
	AnswerInvestment in forward contractInventoryAccounts payableExchange lossExchange gainForeign currency	Answer	Answer
	To restate forward contract to current fair value.
	AnswerInvestment in forward contractInventoryAccounts payableExchange lossExchange gainForeign currency	Answer	Answer
	AnswerInvestment in forward contractInventoryAccounts payableExchange lossExchange gainForeign currency	Answer	Answer
	Cash	Answer	Answer
	To record settlement of the forward contract.
	AnswerInvestment in forward contractInventoryAccounts payableExchange lossExchange gainForeign currency	Answer	Answer
	AnswerInvestment in forward contractInventoryAccounts payableExchange lossExchange gainForeign currency	Answer	Answer
	To record payment to the supplier.