Advanced Accounting 11th Edition by Paul Fischer,William Tayler, Rita Cheng

Exercise 4

Hedging a forecasted transaction with a forward contract. In the process of preparing a budget for the second quarter of the current fiscal year, Anderson Welding, Inc., has forecasted foreign sales of 1,200,00 foreign currency (FC). The company is concerned that the dollar will strengthen relative to the FC and has decided to hedge one-half of the forecasted foreign sales with a forward contract to sell FC in 90 days. Assume that all 1,200,000 of the forecasted sales are shipped 60 days after acquiring the contract and that payment of the sales invoices occurs 30 days after shipment, with terms FOB shipping point. Selected rate information is as shown on page 597.
Assume that contract premiums or discounts are to be amortized on a straight-line basis over the term of the contract. All discounting is to be based on a 6% interest rate.
1. Prepare all entries to record the forecasted sales and the related hedging activity. Assume that financial statements are prepared every month and that entries should be made monthly.
2. Prepare a schedule to compare the impact on earnings of hedging half of the forecasted sales versus not hedging the other half. Assume that the total cost of goods sold was $1,800,000, evenly divided among the sales.