The forward contract is to be settled net University of Belize Advance

# The forward contract is to be settled net university

This preview shows page 4 - 7 out of 7 pages.

The forward contract is to be settled net.
University of Belize Advance Accounting Test –APR 2014 On December 31, 2011, Astrotuff's year end, the forward rate to January 30, 2012 is \$1.78 per pound. The spot and forward rates on January 30, 2012 are \$1.85 per pound. Astrotuff purchases 200,000 pounds of nylon on January 30 when the forward contract expires. Required : Prepare the necessary journal entries to account for this cash flow hedge and related purchase of nylon. 11/1/11 No entry 12/31/11 Other Comprehensive Income 4,000 Forward Contract 4,000 (200,000 × (\$1.80 - \$1.78)) Exchange loss 6,667 Other Comprehensive Income 6,667 Discount = 1.75-1.80= 0.05 x 200,000=10,000 60/90 x 10,000= 6667 1/30/12 Forward Contract 14,000 Other Comprehensive Income 14,000 ((\$1.80 - \$1.85) × 200,000) = \$10,000 asset Exchange loss 3,333 Other Comprehensive Income 3,333 (30/90 x 10,000 = 3333 Cash 10,000 Forward Contract 10,000 Nylon inventory 370,000 Cash 370,000 (200,000 × \$1.85) 4) On November 1, 2010, Mayberry Corporation, a U.S. corporation, purchased from Cantata Corporation, a Mexican company, some machinery that cost 1,000,000 pesos. The invoice was payable in pesos on January 30, 2011. To hedge against rapid changes in the peso, Mayberry entered into a forward contract on November 1, 2010 with AB Trader & Company, a US brokerage and investment firm. The contract specified that Mayberry would buy 1,000,000 pesos from AB Trader at \$0.084 per peso for settlement on January 30, 2011. Assume that all three companies are subject to the same accounting standards and have December 31st year-ends. The spot rates for pesos on
University of Belize Advance Accounting Test –APR 2014 November 1, December 31, and January 30, are \$0.082, \$0.080, and \$0.089, respectively. The 30-day forward rate for pesos on December 31, 2010 is \$0.083. The forward contract is not settled net. Required : Record General Journal entries for Mayberry Corporation on November 1, December 31, and January 30. If no entry is required on a particular date, indicate "No entry" in the General Journal. This is a fair value hedge. Mayberry's General Journal Date Account Name Debit Credit 11/01/10 Machinery 82,000 Accounts Payable (pesos) 82,000 11/01/10 Contract Receivable (pesos) 84,000 Contract Payable 84,000 12/31/10 Accounts Payable (pesos) 2,000 Exchange Gain 2,000 ((.082 - .080) × 1,000,000) 12/31/10 Exchange Loss 1,000 Contract Receivable (pesos) 1,000 [(\$.083 - \$.084) × 1,000,000] 01/30/11 Exchange Loss 9,000 Accounts Payable (pesos) 9,000 [(.089 - .080) × 1,000,000] Contract Receivable (pesos) 6,000 Exchange Gain 6,000 [(.089 - .083 ) × 1,000,000] Cash (pesos) 89,000 Contract payable 84,000 Contract Receivable (pesos) 89,000 Cash 84,000 Accounts Payable (pesos) 89,000 Cash (pesos) 89,000
University of Belize Advance Accounting Test –APR 2014 5) Tank Corporation, a U.S. manufacturer, has a June 30 fiscal year end. Tank

#### You've reached the end of your free preview.

Want to read all 7 pages?

Stuck? We have tutors online 24/7 who can help you get unstuck.
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes