Question

Required information 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 Date Rate Desicription EXchange Rate $.83 1 LCU $.85 1 LCU $.80 1 LcU $.86 1 LCU October 1, 2018 December 31, 2018 Spot rate: Spot rate: 1-Month Forward Rate Spot rate: February 1, 2019 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 fair value hedge; prepare journal entries for this sales transaction and forward contract

Answer 1

Date	General journal	Debit	Credit
10/1/2018	Accounts receivable (100000*0.83)	83000
	Sales		83000
12/31/2018	Accounts receivable (100000*(0.85-0.83))	2000
	Foreign exchange gain		2000
12/31/2018	Loss on forward contract ((0.80-0.78)*100000)*2000*0.9901	1980
	Forward contract		1980
2/1/2018	Accounts receivable (100000*(0.86-0.85))	1000
	Foreign exchange gain		1000
2/1/2018	Loss on forward contract ((0.78-0.86)*100000) = 8000-1980=6020	6020
	Forward contract		6020
2/1/2018	Foreign currency (100000*0.86)	86000
	Accounts receivable		86000
2/1/2018	Cash	78000
	Forward contract (balancing figure)	8000
	Foreign currency (100000*0.86)		86000

78000/100000 = 0.78