On November 1, Year 1, Costok Company (a U.S. based company) purchased merchandise from a foreign supplier for FC50,000 with payment to be made in FC on March 1, Year 2. At the date of purchase, Costok Company entered into a four- month forward contract to buy FC50,000. Relevant exchange rates for the FC are: Date Spot rate Forward Rate (to March 1, Y2) November 1, Year 1 $0.24 $0.23 December 31, Year 1 0.21 0.22 March 1, Year 2 0.20 0.20 Costok Companys incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12% (1% per month) is 0.98. Required: 1. Complete the schedule below: Date Spot Rate Accounts Payable (FC) Forward Rate to 01/03/Y2 Forward Contract US$ value Change in US$ value Fair Value Change in Fair Value

2. The forward contract is properly designated as a cash flow hedge of foreign currency payable. Answer the questions below. Support your answer by computation, where necessary. 2.1. How the forward contract will be reported on December 31 Year 1 Balance Sheet: as an asset or as a liability? 2.2. What is the fair value of the forward contract on December 31, Year 1?

2.3. What is the fair value of the forward contract on March 31, Year 1?

2.4. How the difference between spot and forward rates on December 31, Year 1 will be accounted for (as a premium/discount, and an expense/revenue) and what is the total amount?

3. The forward contract is properly designated as a fair value hedge of foreign currency payable. 3.1. Prepare all journal entries, including December 31, Year 1 adjusting entries, to record the purchase and the forward contract.

3.2. Bonus. What is the total impact of this purchase on net income, assuming inventory was sold for $20,000.