On November 1, 20X1, a U.S. company purchased inventory from a foreign supplier for 100,000 FC, with payment to be made on January 31, 20X2, in FC. To hedge against fluctuations in exchange rates, the firm entered into a forward exchange contract on November 1 to purchase 100,000 FC on January 31, 20X2. The U.S. firm has a December 31 year end for accounting purposes. The following exchange rates may apply:
Discount rate = 12%. The transaction qualifies for treatment as a cash flow hedge.
Required:
Make all the necessary journal entries for the U.S. firm relative to these events occurring between November 1, 20X1, and January 31, 20X2.

Question

On November 1, 20X1, a U.S. company purchased inventory from a foreign supplier for 100,000 FC, with payment to be made on January 31, 20X2, in FC. To hedge against fluctuations in exchange rates, the firm entered into a forward exchange contract on November 1 to purchase 100,000 FC on January 31, 20X2. The U.S. firm has a December 31 year end for accounting purposes. The following exchange rates may apply:  
Discount rate = 12%. The transaction qualifies for treatment as a cash flow hedge.
Required:
Make all the necessary journal entries for the U.S. firm relative to these events occurring between November 1, 20X1, and January 31, 20X2.

Quizplus · Accepted Answer

The Answer of On November 1, 20X1, a U.S. company purchased inventory from a foreign supplier for 100,000 FC, with payment to be made on January 31, 20X2, in FC. To hedge against fluctuations in exchange rates, the firm entered into a forward exchange contract on November 1 to purchase 100,000 FC on January 31, 20X2. The U.S. firm has a December 31 year end for accounting purposes. The following exchange rates may apply:  
Discount rate = 12%. The transaction qualifies for treatment as a cash flow hedge.
Required:
Make all the necessary journal entries for the U.S. firm relative to these events occurring between November 1, 20X1, and January 31, 20X2.