Question
On December 1, year 1, The Magic Company, a US company, entered into a forward contract to sell 200,000 Dinars in 2 months(January 31, Year
On December 1, year 1, The Magic Company, a US company, entered into a forward contract to sell 200,000 Dinars in 2 months(January 31, Year 2) to hedge an accounts receivable. Magic Company has an incremental borrowing rate of 12 percent(1 percent per month). The PV factor is .9901 for just one month. I have factored in the PV calculation in the 2nd table. The following exchange rates apply:
Date | Spot Rate | Forward rate |
December 1, year 1 | $.69 | $.65 |
December 31, year 1 | .70 | .74 |
January 31, year 2 | .73 |
|
Below is a table that you can use to complete the problem.
Accounts Receivable Forward Contract
Date | Spot Rate | US Dollar Value | Change in US Dollar Value | Forward Rate to January 31, Year 2 | Fair value | Change in fair value |
December 1, year 1 | $.69 | $138,000 |
| $.65 | $0 |
|
December 31, year 1 | .70 | 140,000 | 2,000 | .74 | $(17,822) | $(17,822) |
January 31, year 2 | .73 | 146,000 | 6,000 | .73 | $(16,000) | 1,822 |
Required: Prepare all the journal entries assuming the forward contract was entered into as a fair value hedge of a 200,000 Dinars receivable arising from a sale made on December 1, year. Include entries for the sale and the forward contract as of December 1st, the adjusting entries as of December 31st year 1, and the execution of the forward contract and receipt of funds from the customer on January 31, year 2 which includes the adjustment of the foreign currency and fair value hedge at expiration. You must show your work to earn Partial credit. If I cannot see how you are calculating your numbers and they are incorrect you will not earn any credit.
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