Part 1:

Prepare the journal entries for a cash flow hedge.

Follow instructions from the worksheet carefully. Use formulas to enter amounts and data. Show details of your calculations and processes. Explain each journal entry or why one was omitted.

Part 2: Research ASC 815. Describe the proper accounting and reporting for a cash flow hedge. What is the accounting treatment of the gain or loss on your hedging instrument and hedge item at the reporting date? Discuss the effective and ineffective portions of the gain or loss on the hedging instrument. Also, explain the effective and ineffective portion of the gain or loss on the hedging instrument in other comprehensive income (OCI). Your analysis should be two pages in length,

Journal Entries for Hedging a Forecasted Foreign Currency Transaction: A Foreign Currency Cash Value Hedge

Information:

1).

Push Corp operates in the United States. It uses the Euro for local currency transactions.

2).

On Oct 01, 20x7, Push Corp orders inventory items from German Corporation.

3).

Within 30 days, the delivery of the German inventory parts will take place, Nov 1, 20x7.

4).

The contract price is Euro 5,000 to be paid in 180 days, 6 months.

5).

On Oct 01, 20x7, Push Corp hedges its foreign currency payable commitment with a forward exchange contract to receive Euro 5,000 in 210 days (30+180).

6).

The purchase of inventory is forecasted for Nov 20x7, but this is not a binding agreement.

7).

Relevant exchange Rates

Spot Rate

Forward Exchange Rate

10/1/20x7

1.1

1.25

210 days

11/1/20x7

1.15

1.3

180 days

12/31/20x7

1.2

1.35

120 days

4/28/20x8

1.15

0

0

Journal Entries for Hedging a Forecasted Foreign Currency Transaction: A Foreign Currency Cash Value Hedge

Journal Entries:

Debit

Credit

A

Foreign Currency Receivable from Exchange Broker

OCT 01 20x7

Dollars Payable to Exchange Broker($)

(Record signed forward exchange contract for receipt of 5,000 Euro in 210 days)

B.

11/1/20x7

Foreign Currency Receivable (EURO)

Other Comprehensive Income

(Record adjustment of forward contract to fair Value)

11/1/20x7

Inventory

Accounts Payable (Euro)

12/31/20x7

Foreign Currency Receivable (EURO)

Foreign Currency Gain

12/31/20x7

Foreign Currency Loss

Accounts Payable

4/28/20x8

Foreign Currency loss

Foreign Currency Receivable

Accts Payable

Foreign Currency Gain

4/28/20x8

Dollars Payable to Broker

Cash

Foreign Currency Units

Foreign Currency Rec

Acct Payable

Foreign Currency Units

Other Comprehensive Income

Cost of Goods Sold

Cost of Good Sold

Inventory