PROBLEM 12-5 Various Hedging Cases

Apple Company was incorporated in Delaware in 2012. On November 2, 2014, the controller of the company entered into a forward contract to sell 50,000 British pounds for $1.5920 on March 1, 2015. The following exchange rates were quoted on the indicated dates:

Spot Rate Forward Rate March 1 Delivery

November 2, 2014 $1.6021 1.5920

December 31, 2014 1.5820 1.58

March 1, 2015 1.6543

Apple Companys fiscal year-end is December 31.

Assume that the forward contract was entered into as a hedge against an exposed foreign currency receivable balance in the amount of 50,000. Prepare the journal entries that would be made by Apple Company on

(1)November 2to record the sale of the goods on account for 50,000 and to record the forward contract.

(2)December 31to adjust the accounts related to the exposed asset and forward contract at fiscal year-end.

(3)March 1to adjust the accounts related to the exposed asset and forward contract and to record the set-tlement of the receivable and delivery of the pounds to the exchange dealer.

B.Assume that the controller indicated on November 2 that the forward contract was acquired as a hedge of afuture foreign currency transaction that is a commitment of Apple to sell inventory for 50,000 on March 1.Apple Company designates this hedge as a fair value hedge of an unrecognized firm commitment. Prepare the journal entries related to the forward contract and commitment to sell inventory that would be made by Apple Company on November 2, December 31, and March 1.

C.Assume that the contract was entered into to speculate in future exchange rate fluctuations. Prepare the journal entries that would be made by Apple Company on November 2, December 31, and March 1.

D.Compute the effect of the transactions in (A), (B), and (C) on the net income for the fiscal years ended December 31, 2014, and December 31, 2015. Indicate how the balance sheet accounts related to the forwardcontract would be reported in the December 31, 2014, balance sheet.