Question

Exercise 2.2 A Zorba Company, a US-based importer of specialty olive oil, placed olive oil at a price of 100 euro per case. The total purchase price is 30, Date Spot rate December 1, Year 1 $1 $1.08 December 31, Year 1 1.1 1.17 January 31, Year 2 1.15 1.15 Zorba Company has an incremental borrowing rate of 12 percent (1 per and prepares financial statements on December 31. The present value Tacto interest rate of 12% is 0.9901. ve oil, placed an order with a foreign supplier for 500 cases of urchase price is 50.000 euro. Relevant exchange rates are as follows: Forward Rate (to January 31, Y2) percent (1 percent per month) and closes the books ne present value factor for one month at an annual Required: Assume the olive oil was received on December 1, Y1 and paymen received on December 1, Y1 and payment was made on January 31, Y2. On December 1 Y1, Zorba Company entered into a two-month forward contract to purchase 50,000 euros The Torward contract is properly designated as a fair value hedge of foreign currency payable Prepare journal entries to account for import purchase and foreign currency forward con Forward Contract Fair Value Hedge of a Recognized Foreign Currency Liability Date Spot Accounts Payable (FC) Forward Forward Contract Rate US$ value Change in Rate to Fair Value Change in US$ value Jan 31/42 Fair Value

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Answer 1

А В C D F G Н Accounts Payable Forward Contract 1 Forward Rate Spot Rate Date Change in change in Fair Value Fair Value Present value of $ Value Change Fair Value 50000 55000 54000 58500 57500 3 December 1, Year 1 1.08 5000 7500 4455.45 4455.45 3500.00 955.45 4 December 31, Year 1 1.1 1.17 5 January 31, Year 2 1.15 57500 1.15 6

А В C Е G Accounts Payable Forward Contract Forward Rate Date Spot Rate Change in Fair Present value of $Value Change Fair Value change in Fair Value Value 2 -50000 B3 +C3-50000 1.08 -50000*B4++C4-50000 1.17 -50000*B5 +C5-50000 1.15 +E3* 50000 +E4*50000+(F4-F3)*0.990099 G4-G3 +E5*50000+(F5-F3) 3 December 1, Year 1 4 December 31, Year 1 1.1 5 January 31, Year 2 1 +G4-G5 1.15 6

B C 7 8 Dec 31 year 1 forward Contract 4455.45 Gain on Forward Contract 4455.45 (Gain from Forwarding Contract Recorded) 10 11 12 Dec 31 year 1 Loss on Firm Commitment 4455.45 13 Firm Commitment 4455.45 (Loss on firm Commitment Recorded) 14 15 Loss on Forward Contract 16 Jan31 Year 2 955.45 forward Contract 17 955.45 (Loss on Forward Contract Recorded) 18 19 Firm Commitment 20 Jan31 Year 2 955.45 21 Gain on Firm Commitment 955.45 (Gain on firm Commitment Recorded) 22 23 24 Jan31 Year 2 Foreign Currency 57500 Cash 25 54000 Forward Contract 26 3500 |(Receipt of foreign Currency for payment recorded) 27 28 29 Jan31 Year 2 Inventory 57500 foreign currency 30 57500 (Purchase of inventory From Foreign Currency) 31 32 33