Cummings Industries Places a Firm Order for the Equipment on June

Cummings Industries places a firm order for the equipment on June 30, 2013.It simultaneously signs a forward currency contract for £20,000.The forward rate on June 30, 2013, for settlement on June 30, 2014, is $1.64 per £1.Cummings designates the forward contract as a fair value hedge of the firm commitment.
REQUIRED:

a. U.S. GAAP and IFRS guidance does not require Cummings to record either the purchase commitment or the forward contract on the balance sheet as a liability or an asset on June 30, 2013. What is the logic for this accounting?

b. On December 31, 2013, the forward exchange rate for settlement on June 30, 2014, is $1.73 per £1. Give the journal entries to record the change in the fair value of the purchase commitment and the change in the fair value of the forward contract for 2013. Assume an 8% interest rate for discounting cash flows to their present values on December 31, 2013.

c. Give the journal entries on June 30, 2014, to record the change in the present value of the purchase commitment and the forward contract for the passage of time.

d. On June 30, 2014, the spot exchange rate is $1.75 per £1. Give the journal entries to record the change in the fair value of the purchase commitment and the change in the fair value of the forward contract due to changes in the exchange rate during the first six months of 2014.

e. Give the journal entry on June 30, 2014, to purchase £20,000 with U.S. dollars and acquire the equipment.

f. Give the journal entry on June 30, 2014, to settle the forward contract.

g. How would the entries in parts (b) through (f) differ if Cummings had chosen to designate the forward currency contract as a cash flow hedge of a forecasted transaction instead of a fair value hedge of a firm commitment?

h. What type of scenario would justify Cummings treating the forward currency contract as a fair value hedge? What type of scenario that would justify the firm treating the contract as a cash flow hedge?.