P 12-3

Foreign Trade Journal Entries and Forward Contract Hedge

On December 1, 2008, King Company exported equipment that had cost $210,000 to a Brazilian company

for 1,000,000 real. The acount is to be settled on January 31, 2009. King company is a calendar-year

company and uses a perpetual inventory system. Direct exchage rates were:

Spot Rate

1-Dec

$0.44

31-Dec

0.369

31-Jan

0.4421

Required:

A.) Prepare journal entries to record the exporting transaction, adjust the accounts on December 31.

and settle the account on January 31.

B.) What effect did changes in the exchange rate have on income in 2008 and 2009?

C.) Assume the facts given above, except that on December 1, King Company entered into a forward

contract to sell 1,000,000 Real on January 31 for $.4451 per real. Prepare the journal entries needed

in 2008 and 2009 to record the forward contract and sette the accounts. The forward rate on Decembr

31 for January 31 delivery was $.3810.

D,) What is the combined effect on income in 2008 and 2009 from the exporting transaction and the

forward contract?