Question
On December 5, 20X8, our US-based company entered into a firm commitment with an Ireland-based retailer. The firm commitment requires our company to sell 30,000
On December 5, 20X8, our US-based company entered into a firm commitment with an Ireland-based retailer. The firm commitment requires our company to sell 30,000 units of an inventory item costing 12.00 each to the Irish company. Our company is contractually committed to ship the inventory on March 5, 20X9, with payment in Euros on the same date. Our company does business with the Irish company on a recurring basis, and the firm commitment includes significant monetary penalties for nonperformance. On December 5, 20X8, our company entered into a contract with an exchange broker to sell Euros for settlement on March 5, 20X9. Assume this derivative qualifies as a hedge. Our companys functional currency is the $US. Spot rates and forward rates on December 5, 20X8, December 31, 20X8 and March 15, 20X9 are shown below.
Date | Spot Rate $US= 1 | Forward Rate $US= 1 for settlement on January 20, 20X9 |
December 5, 20X8 | 1.23 | 1.21 |
December 31, 20X8 | 1.20 | 1.18 |
March 15, 20X9 | 1.16 | 1.16 |
When computing fair values, ignore discounting. Required:
Prepare the journal entries related to the sale and all adjustments for the firm commitment and forward contract as of December 5, 20X8, December 31, 20X8 and March 15, 20X9.
Was this contract beneficial to our company? Explain.
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