1.            On 1 November 2019 Pippen Ltd contacts Jordan Inc to enquire about US$20m worth of machinery that Jordan Inc is manufacturing. By the 30 November the two companies have agreed sale terms after making extensive enquiries, including those on finance terms, exchange rates and forward rates. The eventual sale is concluded on 1 December 2019, whereby Jordan Inc of the USA sells machinery to Pippen Ltd of Portugal for the payment amount of €20m to be made on 1 March 2020.

On the sale date of 1 December, Jordan Inc also enters into a forward contract with its bank to sell €20m in exchange for US Dollars on 1 March 2020.The relevant spot and forward exchange rates for the Euro/US$ on the various dates are as follows:

1-Dec-19: Spot €1=US$1 & Forward Rate to 1-Mar-20 €1=US$1.04

31-Dec-19: Spot €1=US$1.05 & Forward Rate to 1-Mar-20 €1=US$1.10

1-Mar-20: Spot €1=US$1.12

Jordan Inc’s incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent (1 percent per month) is 0.9803.

Assume that the forward contract discount or premium is allocated on a straight-line basis.

a.            How many US$ does Jordan Inc expect to receive under the Forward Contract on 1 March 2020?

b.            Assuming that Jordan Inc designates the forward contract as a cash flow hedge of a foreign currency receivable, provide the journal entries for these transactions in US$ on each of the dates (1-Dec-19, 31-Dec-19 (year-end) and 1-Mar-20).

c.             Show the impact on Net Income for these transactions in 2019 and 2020 under Cash Flow Hedge accounting.

d.            Now assume that Jordan Inc designates the forward contract as a fair value hedge of a foreign currency receivable. In this case, prepare the journal entries for these transactions in US$ on each of the dates (1-Dec- 19, 31-Dec-19 (year-end) and 1-Mar-20).

e.            Show the impact on Net Income for these transactions in 2019 and 2020 under Fair Value Hedge accounting.