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28 March, 16:47

Prepare journal entries, assuming that Sharp entered into the forward contract as a fair value hedge of a firm commitment related to a 100,000 ruble sale that will be made on January 31, 2018. Include entries for both the firm commitment and the forward contract. The fair value of the firm commitment is measured by referring to changes in the forward rate. (Do not round intermediate calculations. If no entry

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  1. 28 March, 16:52
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    Complete question:

    On October 1, 2017, Sharp Company (based in Denver, Colorado) entered into a forward contract to sell 330,000 rubles in four months (on January 31, 2018) and receive $115,500 in U. S. dollars. Exchange rates for the ruble follow:Date Spot Rate Forward Rate (to January 31, 2018) October 1, 2017 $ 0.35 $ 0.39 December 31, 2017 0.38 0.41 January 31, 2018 0.40 N/ASharp's incremental borrowing rate is 12 percent. The present value factor for one month at an annual interest rate of 12 percent (1 percent per month) is 0.9901. Sharp must close its books and prepare financial statements on December 31.

    Prepare journal entries, assuming that Sharp entered into the forward contract as a fair value hedge of a 100,000 ruble receivable arising from a sale made on October 1, 2017. Include entries for both the sale and the forward contract.

    Prepare journal entries, assuming that Sharp entered into the forward contract as a fair value hedge of a firm commitment related to a 100,000 ruble sale that will be made on January 31, 2018. Include entries for both the firm commitment and the forward contract. The fair value of the firm commitment is measured by referring to changes in the forward rate.

    Solution:

    Date Account tides Debit (S in ruble) Credit (S in ruble)

    and Explanation

    Oct 1 Accounts receivable 96,600

    Sales

    (210,000 ruble x $0.46) 96,600

    Dec 31 Accounts receivable

    (50.49-50.46) x (210,000 ruble) 6,300

    Foreign Exchange gain 6,300

    Loss on forward contract 2079,21

    Forward Contract

    (50.52-50.51) x 210,000 ruble = 2,100

    2,100 x 0.9901 = $2079.21 2079.21

    Jan31 Accounts receivable (LC U) 4,200

    Foreign exchange gain

    (50.51-50.49) x 210,000 ruble 4200

    Foreign currency 107,100

    Accounts receivable

    (596.600-56,300-54,200) 107,100

    Cash 107,100

    Foreign currency (LCU)

    ($0.51 x 210,000 ruble) 107,100
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