On October 1, 20x1, Insulate Corporation entered into a non-US sale transaction with a foreign company, ICE Company by selling $70,400 of its merchandise to ICE. The sale was on account and will be settled on February 1, 20x2.

Insulate Corporation, the seller, is a U.S. based company. Its customer, ICE is a non-US company that uses a currency called LCU. In accordance with the terms of sale, Insulate Corporation agrees to allow ICE to pay in their own country currency. At 10/1, ICE Company agreed to pay Insulate Corporation 220,000 LCUs on or before 2/1/20x2.

At the date of the sale, Insulate Corporation entered into a forward foreign currency exchange contract as a hedge of the non-US sale. Any contract discount or premium is amortized using the straight-line method.

The spot rates and forward rates on various dates are:

Date	Rate Description	Exchange Rate
October 1, 20x1	Spot Rate	$0.32 = 1 LCU
	February 1 - Forward Rate	$0.30 = 1 LCU
December 31, 20x1	Spot Rate	$0.29 = 1 LCU
	February 1 - Forward Rate	$0.28 = 1 LCU
February 1, 20x2	Spot Rate	$0.27 = 1 LCU

(Note for this transaction, you can ignore the time value of money considerations.)

Required

Assuming the customer made their payment on February 1, 20x2, as agreed, and Insulate Corporation designated the forward exchange contract as a cash flow hedge of the sale to the foreign customer, prepare the journal entries recording the sales transaction and the forward exchange hedge transaction at,

1. October 1, 20x1.
2. December 31, 20x1.
3. February 1, 20x2, including the journal entries for completion of the sale and closing out the forward exchange contract.
4. If Insulate Corporation had designated the forward exchange contract as a fair value hedge, briefly explain how the accounting would have differed from your answers in parts A & B. (Journal entries are permitted but not required).
5. From the perspective of the non-US purchaser, explain the foreign exchange risk they are exposed to in this transaction and suggest the type of derivative instrument the purchaser might consider for hedging that risk, i.e. the type of forward exchange contract or foreign currency option they might enter into.