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Jones Corporation placed an order to purchase merchandise from a foreign supplier on August 1, 2010 for 100,000 FC (Foreign Currency). On October 31, 2010, the merchandise is delivered and paid for and is fully consumed by December 31, 2010. Jones Corporation also entered into a forward contract on August 1, 2010 to purchase 100,000 FC in three months at the agreed-on forward rate. The forward contract is properly designated as a fair value hedge of a fair value currency firm commitment. The fair value of the firm commitment is measured through reference to changes in the forward rate. Relevant rates for the FC are as follows:

Date Spot Rate Forward Rate, Oct 31, 2010
August 1 $1.300 $1.310
September 31 $1.305 $1.325
October 31 $1.320

The company has an incremental borrowing rate of 12%. It must close its books and prepare third-quarter financial statements on September 30, 2010. Prepare journal entries for the forward contract and firm commitment.

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  • Category:- Accounting Basics
  • Reference No.:- M952713

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