On November 1, Year 1, Edsel Inc. placed an order with a company in Switzerland to purchase 1,000 reproduction wire wheels at a price of 150 Swiss Francs (CHF) each. Relevant exchange rates are as follows:

Spot Forward Rate

Date Rate (to April 30, Year 2)

November 1, Year 1. . . . . . . . . . . . . . $1.00 $1.08

December 31, Year 1. . . . . . . . . . . . . . 1.10 1.17

April 30, Year 2. . . . . . . . . . . . . . . . . . 1.15 1.15

Edsel Inc. closes the books and prepares financial statements on December 31, Year 1.

Assume the hubcaps were received on November 1, Year 1 and Edsel pays the supplier on April 30, Year 2. On November 1, Edsel Inc. entered into a six-month forward contract to purchase CHF 150,000. The forward contract is properly designated as a fair value hedge of a foreign currency payable. The present value factor for four months at an incremental borrowing rate of 12 percent (1 percent per month) is .96098. Prepare journal entries to account for the purchase and foreign currency forward contract. Where appropriate, round to 2 decimal points.

Edsel Inc. is a U.S.-based manufacturer of auto parts and related supplies in the classic car market. On November 1, Year 1, Edsel sold and shipped auto parts to a customer in Canada for a price of 300,000 Canadian Dollars (CAD). Payment is to be received on January 30, Year 2. On the date of sale, Edsel also entered into a three-month forward contract to sell CAD 300,000. The forward contract is properly designated as a cash flow hedge of a foreign currency receivable. Edsels incremental borrowing rate is 12% (1% per month). The present value factor for one month at an incremental borrowing rate of 12% is .99010. Relevant exchange rates are as follows:

Spot Forward Rate

Date Rate (to January 30, Year 2)

November 1, Year 1. . . . . . . . . . . . . . $1.1584 $1.1576

December 31, Year 1. . . . . . . . . . . . . . 1.2597 1.2591

January 30, Year 2. . . . . . . . . . . . . . . . 1.2456 1.2456

As discussed in our lectures and in the text, the company is required to formally document the hedging transaction at the time the forward contract is entered into. In general, what information is to be included in order to satisfy the hedge documentation requirements?

Prepare all necessary journal entries to account for the sale and foreign currency forward contract. Assume that Edsel Inc. closes the books and prepares financial statements on December 31, Year 1.

Where appropriate, round to 2 decimal points.

Based upon your work in No. 2 above, what is the impact on net income for each year, and in total, due to the foreign currency aspects of this transaction?

2. Based upon your work in No. 1 above, what is the impact on net income for each year, and in total, due to the foreign currency aspects of this transaction?