Question
In August, our company sells inventory to a customer in Switzerland, receivable in Swiss Francs (CHF). The receivable is CHF200,000 and the exchange rate on
In August, our company sells inventory to a customer in Switzerland, receivable in Swiss Francs (CHF). The receivable is CHF200,000 and the exchange rate on the date of sale is $1.20:CHF1. Payment is due in 60 days. Our company feels that the $US has been over-sold and is likely to rebound during the next 60 days, thus lowering the $US equivalent of the receivable. The current forward price for 90-day delivery of $1.15 reflects our view. Since we feel that the $US is likely to strengthen even more, we purchase a forward contract to sell Swiss Francs at $1.15 60 days hence. When the receivable is collected in 60 days, the exchange rate at that date is $1. 05: CHF1.
Assume the following data relating to the spot and forward rates for the $US in relation to the CHF:
| Spot rate | Forward Rate |
August | $1.20 : CHF1 | $1.15 : CHF1 |
Sept. 30 | $1.10 : CHF1 | $1.07 : CHF1 |
October | $1.05 : CHF1 | $1.05 : CHF1 |
1. Required: Prepare the AUGUST journal entry to record the accounts receivable and the sale (ignore cost of goods sold). This would be the regular journal entry (not the FV Hedge).
2. Required: Prepare the FV Hedge transaction journal entry for AUGUST.
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