Hedging Exposed Liability Position On March 15, 2023, Hunt Brands, a U.S. company, purchased merchandise from a South African company at a price of R1,000,000, payable in two months in rands. To hedge its exposed liability position, Hunt entered a forward contract for purchase of R1,000,000 on May 15, 2023. On May 15, Hunt closed the forward contract and used the rands to pay its supplier. The merchandise was sold to a U.S. customer for $110,000 in cash on June 5, 2023. Hunt's accounting year ends December 31. Exchange rates ($/R) are as follows: March 15, 2023 May 15, 2023 Spot rate $0.0650 0.0654 Forward rate for delivery May 15, 2023 $0.0651
Hedging Exposed Liability Position On March 15, 2023, Hunt Brands, a U.S. company, purchased merchandise from a South African company at a price of R1,000,000, payable in two months in rands. To hedge its exposed liability position, Hunt entered a forward contract for purchase of R1,000,000 on May 15, 2023. On May 15, Hunt closed the forward contract and used the rands to pay its supplier. The merchandise was sold to a U.S. customer for $110,000 in cash on June 5, 2023. Hunt's accounting year ends December 31. Exchange rates ($/R) are as follows: March 15, 2023 May 15, 2023 Spot rate $0.0650 0.0654 Forward rate for delivery May 15, 2023 $0.0651
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Hedging Exposed Liability Position
On March 15, 2023, Hunt Brands, a U.S. company, purchased merchandise from a South African company at a price of
R1,000,000, payable in two months in rands. To hedge its exposed liability position, Hunt entered a forward contract for
purchase of R1,000,000 on May 15, 2023. On May 15, Hunt closed the forward contract and used the rands to pay its supplier.
The merchandise was sold to a U.S. customer for $110,000 in cash on June 5, 2023. Hunt's accounting year ends December 31.
Exchange rates ($/R) are as follows:
March 15, 2023
May 15, 2023
Spot rate
$0.0650
0.0654
Forward rate for delivery
May 15, 2023
$0.0651
Transcribed Image Text:Required
a. Prepare the journal entries Hunt Brands made on March 15, May 15, and June 5, 2023. Assume Hunt records cost of
goods sold at the time of sale.
Description
Date
3/15/23
5/15/23
6/5/23
To record goods purchased.
To restate payable at current spot rate.
To restate forward contract to current fair value.
To record payment to the supplier.
4
To record sale to U.S. customer.
⇓⇓
Cash
To record the settlement of the forward contract.
To record cost of goods sold on sale.
45
4)
O
4
Debit
Credit
b. Calculate the cash gain or loss realized by Hunt Brands by hedging compared with not hedging.
$
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