Question 3Consider the following information.1. On September 1, 2022, a US firm contracts to buy equipment with an asking price of£100,000 from a firm in the U.K. The firm will take delivery and will pay for the equipmenton March 1, 2023.2.On that same day, September 1, 2022, the US firm enters into a forward contract to buy£100,000 for US$1.60/£ on March 1, 2023.3.Spot rates and forward rates were quoted as follows:Spot Rate$1.59/£$1.55/£March 1, 2023$1.57/£On March 1, 2022, the payment of £100,000 was made to the supplier of the equipment.4.September 1, 2022September 30, 2022Forward Rate$1.60/£$1.53/£Required:a. Prepare the journal entries needed for the forward contract transaction done onSeptember 1, 2022.b.Prepare the journal entries needed for the transactions to track the forward contract onSeptember 30, 2022, the financial year-end of the US firm.c.Prepare the transactions for the recognition of the actual purchase of the equipment andsettlement of forward contract on March 1, 2023, to account for the forward contract,the firm's commitment, and the transaction to buy the equipment.

This question is based on Forward Contract . Forward Contract is a special arrangement between two…

Answered: Consider the following information. 1.…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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4
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A merchant in the UK has agreed to sell goods to an importer in the USA at an invoice price of $130,000. Of this amount, $40,000 will be payable on shipment, $60,000 one month after shipmentand $30,000 three months after shipment.The quoted foreign exchange rates ($ per £) at the date of shipment are as follows:Spot rate (on shipment) 1.690 -1.692Forward rate-(one month after) 1.687 -1.690Forward rate-(three months after) 1.680 -1.684The merchant decides to enter forward exchange contracts through his bank to hedge these transactions for fear that the future spot rates may change to his disadvantage. i. State what are the presumed advantages of using forward exchange contracts. ii. Calculate the sterling amount that the merchant would receive on these contracts. iii. Comment on the wisdom of the merchant decision to hedge by comparing his total receipts inpound sterling, assuming the spot rate ($ per £) at the dates of receipt of first payment upon shipment remains the same but rates…

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