Problem
On November 1, 2015, Ambrose Company sold merchandise to a foreign customer for 120,000 FCUs with payment to be received on April 30, 2016. At the date of sale, Ambrose entered into a six-month forward contract to sell 120,000 LCUs. It properly designates the forward contract as a cash flow hedge of a foreign currency receivable. The following exchange rates apply:
|
Date
|
Spot Rate
|
Forward Rate
(to April 30, 2016)
|
|
November 1, 2015
|
$0.53
|
$0.52
|
|
December 31, 2015
|
0.50
|
0.48
|
|
April 30, 2016
|
0.49
|
N/A
|
Ambrose's incremental borrowing rate is 12 percent. The present value factor for four months at an annual interest rate of 12 percent (1 percent per month) is 0.9610.
Provide Journal entries for the following:
1. Record sale of merchandise to foreign customer.
2. Record the forward contract.
3. Record the entry for changes in the exchange rate.
4. Record the change in the fair value of the forward contract.
5. Record entry to adjust the carrying value of the forward contract to its current fair value.
6. Record the premium or discount expense.
7. Record the entry for changes in the exchange rate.
8. Record the change in the fair value of the forward contract.
9. Record entry to adjust the carrying value of the forward contract to its current fair value.
10. Record the premium or discount expense.