Problem (100 points) Panthers Corp., a U.S. importer of wine, placed an order with an Italian supplier for 500,000 bottles of wine, at a price of Euro 15 per bottle. Relevant exchange rates are as follows: Date Spot Rate 1-Nov-19 31-Dec-19 31-Jan-20 $ 1.119 1.122 1.115 Forward Rate (to January 31, 2020) $ 1.125 1.130 1.115 Panthers has an incremental borrowing rate of 12 percent (1 percent per month) and prepares the financial statements on December 31. Required a) Assume the wine was received on November 1, 2019, and payment was made on January 31, 2020. There was no attempt to hedge the exposure to foreign exchange risk. Prepare the journal entries to account for this import purchase. (20 points) b) Assume the wine was received on November 1, 2019, and payment was made on January 31, 2020. On November 1, Panthers entered into a three-month forward contract to purchase Euro 7.5 million. The forward contract is properly designated as a cash flow hedge of a foreign currency payable. Prepare the journal entries to account for the import purchase and foreign currency forward contract. (30 points) c) How would you change your answer in b) if Panthers designates the forward contract as fair value hedge of a foreign currency payable? Prepare the journal entries to account for the import purchase and foreign currency forward contract. (30 points) d) Summarize the difference in income under the three alternative scenarios. (20 points). Problem (100 points) Panthers Corp., a U.S. importer of wine, placed an order with an Italian supplier for 500,000 bottles of wine, at a price of Euro 15 per bottle. Relevant exchange rates are as follows: Date Spot Rate 1-Nov-19 31-Dec-19 31-Jan-20 $ 1.119 1.122 1.115 Forward Rate (to January 31, 2020) $ 1.125 1.130 1.115 Panthers has an incremental borrowing rate of 12 percent (1 percent per month) and prepares the financial statements on December 31. Required a) Assume the wine was received on November 1, 2019, and payment was made on January 31, 2020. There was no attempt to hedge the exposure to foreign exchange risk. Prepare the journal entries to account for this import purchase. (20 points) b) Assume the wine was received on November 1, 2019, and payment was made on January 31, 2020. On November 1, Panthers entered into a three-month forward contract to purchase Euro 7.5 million. The forward contract is properly designated as a cash flow hedge of a foreign currency payable. Prepare the journal entries to account for the import purchase and foreign currency forward contract. (30 points) c) How would you change your answer in b) if Panthers designates the forward contract as fair value hedge of a foreign currency payable? Prepare the journal entries to account for the import purchase and foreign currency forward contract. (30 points) d) Summarize the difference in income under the three alternative scenarios. (20 points)
