International Accounting

On October 1, Year 1, Butterworth Company entered into a forward con-

tract to sell 100,000 rupees in four months (on January 31, Year 2). Relevant

exchange rates for the rupee are as follows:

Date Spot Rate Forward Rate (to January 31, Year 2)

October 1, Year 1 $0.069 $0.065

December 31, Year 1 0.071 0.074

January 31, Year 2 0.072

Butterworth Company's incremental borrowing rate is 12 percent. The present

value factor for one month at an annual interest rate of 12 percent (1 percent

per month) is 0.9901. Butterworth must close its books and prepare financial

statements on December 31.

Required:

a. Prepare journal entries assuming the forward contract was entered into as

a fair value hedge of a 100,000-rupee receivable arising from a sale made

on October 1, Year 1. Include entries for both the sale and the forward

contract.