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Question: On November 15, 2013, Oil&Gas Inc. imported 500,000 barrels of oil from an oil company in Venezuela. Oil&Gas agreed to pay 50,000,000 bolivars on January 15, 2014. To ensure that the dollar outlay for the purchase will not fluctuate, the company entered into a forward contract to buy 50,000,000 bolivars on January 15 at the forward rate of $0.0269. Exchanges rates on various dates were:

November 15, 2013: Spot Rate = $0.0239 ; Forward Rate 1/15 Delivery = $0.0269

December 31, 2013: Spot Rate = $0.0224 ; Forward Rate 1/15 Delivery = $0.0254

January 15, 2014: Spot Rate = $0.0291

Oil&Gas properly account for the transaction as Fair Value Hedge. The 15-day present value factor is 0.9934.

Required: 1) Record the journal entries needed by Oil&Gas on November 15, December 31 and January 15. Round all entries to the nearest whole dollar.

2) Answer the following questions:

a. Indicate the amount of the discount or premium at which the foreign currency was original sold in the foreign currency market.

b. What is the dollar amount paid by Oil&Gas on January 15, 2014?

c. What is the accumulated net impact on Oil&Gas's Stockholder equity related to this transaction at January 15, 2014?

d. What would have been the dollar amount paid by Oil&Gas to settle the account payable had Oil&Gas not hedged the purchase contract with the forward contract?

e. What would have been the accumulated net impact on Oil&Gas's Stockholder equity related to this transaction on January 15, 2014 if Oil&Gas had not entered in the Forward Contract? Was Oil&Gas better off or worse off with the derivative contract?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M92857610

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