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#11 On October 20, 2018, our company purchased a from a company located in Luxembourg...

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Accounting

#11

On October 20, 2018, our company purchased a from a company located in Luxembourg 100,000 units of a product at a purchase price of 6.00 per unit. Our company is required to pay for the merchandise in Euros (). The due date of our payment is January 20, 2019. On October 20, 2018, our company entered into a forward contract with an exchange broker to mitigate fluctuation risk. The contract obligates our company to by 600,000 on January 20, 2019 at the forward rate on October 20, 2018 for settlement on January 20, 2019. Assume this derivative qualifies as a hedge. Our companys functional currency is the $US. Spot rates and forward rates on October 20, 2018, December 31, 2018 and January 20, 2019 are shown below.

Date

Spot Rate $US= 1

Forward Rate $US= 1 for settlement on January 20, 20X9

October 20, 20X8

1.47

1.44

December 31, 20X8

1.40

1.39

January 20, 20X9

1.37

1.37

When computing fair values, ignore discounting.

Required:

  • Prepare the journal entries related to the purchase, payable, cash and derivative as of October 20, 2018, December 31, 2018 and January 20, 2019.
  • Was this contract beneficial to our company? Explain.

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