Question

On October 1, 2018, Jarvis Co. sold inventory to a customer in a foreign country, denominated in 100,000 local currency units (LCU).Collection is expected in four months. On October 1, 2018, a forward exchange contract was acquired whereby Jarvis Co. was to pay 100,000 LCU in four months (on February 1, 2019) and receive $78,000 in U.S. dollars. The spot and forward rates for the LCU were as follows:

Rate DescriptionExchange Rate .83-1 LCU 5.85 1 LCU Spot rate: Spot rate: 1-Month Forward Rate $.be = 1 LCU Spot rate: October 1, 2018 December 31, 2018 February 1, 2019 .86 1 LCU The,company's borrowing rate is 12%. The present value factor for one month is .9901. Any discount or premium on the contract is amortized using the straight-line method , Assuming this is a cash flow hedge:
prepare journal entries for this sales transaction and forward contract.

Answer 1

10/1/2018

Dr Accounts receivable $83,000

Cr Sales $83,000

12/31/2018

Dr Accounts receivable $2,000

Cr Foreign exchange gain $2,000

12/31/2018

Dr Loss on forward contract $1,980

Cr Forward contract $1,980

2/1/2018

Accounts receivable $1000

Cr Foreign exchange gain $1000

2/1/2018

Dr Loss on forward contract $6,020

Cr Forward contract $6,020

2/1/2018

Dr Foreign currency

$86,000

Accounts receivable $86,000

2/1/2018

Dr Cash $78,000

Dr Forward contract $8,000

Cr Foreign currency $86,000

Step-by-step explanation:

Preparation of the journal entries for the sales transaction and forward contract.

10/1/2018

Dr Accounts receivable (100000*0.83) $83,000

Cr Sales $83,000

12/31/2018

Dr Accounts receivable $2,000

[100,000*(0.85-0.83)]

Cr Foreign exchange gain $2,000

12/31/2018

Dr Loss on forward contract $1,980

[((0.80-0.78)*100000)*2000*0.9901]

Cr Forward contract $1,980

2/1/2018

Accounts receivable $1000

[100000*(0.86-0.85)]

Cr Foreign exchange gain $1000

2/1/2018

Dr Loss on forward contract $6,020

(78000/100000 = 0.78)

[ ((0.78-0.86)*100000) = 8000-1980=6020]

Cr Forward contract $6,020

2/1/2018

Dr Foreign currency (100000*0.86)

$86,000

Accounts receivable $86,000

2/1/2018

Dr Cash $78,000

Dr Forward contract $8,000

($86,000-$78,000)

Cr Foreign currency (100000*0.86) $86,000