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On August 1, Pure Joy Corporation (a U.S.-based Importer) placed an order to purchase merchandise from a foreign supplier at a price of 400,000 pounds. Pure Joy will receive and make payment for the merchandise in three months on October 31. On August 1, Pure Joy entered into a forward contract to purchase 400,000 pounds in three months at a forward rate of $0.60 per pound. The company properly designates the forward contract as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured by referring to changes in the forward rate and, therefore, forward points are included in assessing hedge effectiveness. Relevant U.S. dollar exchange rates for the pound are as follows: Date August 1 September 30 October 31 Spot Rate $ 0.60 0.63 0.68 Forward Rate (to October 31) $ 0.60 0.66 N/A Pure Joy must close its books and prepare its third-quarter financial statements on September 30. The merchandise is received and paid for on October 31 and sold to local customers in November. Discounting to present value can be ignored. Required: a. Prepare journal entries for the foreign currency forward contract, foreign currency firm commitment, and import purchase. b. What is the impact on net income over the two accounting periods? c. What is the amount of net cash outflow resulting from the purchase of merchandise from the foreign supplier? Complete this question by entering your answers in the tabs below. Req A Req B and C b. What is the impact on net income over the two accounting periods? c. What is the amount of net cash outflow resulting from the purchase of merchandise from the foreign supplier? Note: For all requirements, do not round intermediate calculations. Negative amounts should be entered with a minus sign. b. Impact on net income c. Net cash outflow < Req A Rag and

On August 1, Pure Joy Corporation (a U.S.-based Importer) placed an order to purchase merchandise from a foreign supplier at a price of 400,000 pounds. Pure Joy will receive and make payment for the merchandise in three months on October 31. On August 1, Pure Joy entered into a forward contract to purchase 400,000 pounds in three months at a forward rate of $0.60 per pound. The company properly designates the forward contract as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured by referring to changes in the forward rate and, therefore, forward points are included in assessing hedge effectiveness. Relevant U.S. dollar exchange rates for the pound are as follows: Date August 1 September 30 October 31 Spot Rate $ 0.60 0.63 0.68 Forward Rate (to October 31) $ 0.60 0.66 N/A Pure Joy must close its books and prepare its third-quarter financial statements on September 30. The merchandise is received and paid for on October 31 and sold to local customers in November. Discounting to present value can be ignored. Required: a. Prepare journal entries for the foreign currency forward contract, foreign currency firm commitment, and import purchase. b. What is the impact on net income over the two accounting periods? c. What is the amount of net cash outflow resulting from the purchase of merchandise from the foreign supplier? Complete this question by entering your answers in the tabs below. Req A Req B and C b. What is the impact on net income over the two accounting periods? c. What is the amount of net cash outflow resulting from the purchase of merchandise from the foreign supplier? Note: For all requirements, do not round intermediate calculations. Negative amounts should be entered with a minus sign. b. Impact on net income c. Net cash outflow < Req A Rag and

FINANCIAL ACCOUNTING
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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On August 1, Pure Joy Corporation (a U.S.-based Importer) placed an order to purchase merchandise from a foreign supplier at a price of 400,000 pounds. Pure Joy will receive and make payment for the merchandise in three months on October 31. On August 1, Pure Joy entered into a forward contract to purchase 400,000 pounds in three months at a forward rate of $0.60 per pound. The company properly designates the forward contract as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured by referring to changes in the forward rate and, therefore, forward points are included in assessing hedge effectiveness. Relevant U.S. dollar exchange rates for the pound are as follows: Date August 1 September 30 October 31 Spot Rate $ 0.60 0.63 0.68 Forward Rate (to October 31) $ 0.60 0.66 N/A Pure Joy must close its books and prepare its third-quarter financial statements on September 30. The merchandise is received and paid for on October 31 and sold to local customers in November. Discounting to present value can be ignored. Required: a. Prepare journal entries for the foreign currency forward contract, foreign currency firm commitment, and import purchase. b. What is the impact on net income over the two accounting periods? c. What is the amount of net cash outflow resulting from the purchase of merchandise from the foreign supplier? Complete this question by entering your answers in the tabs below. Req A Req B and C b. What is the impact on net income over the two accounting periods? c. What is the amount of net cash outflow resulting from the purchase of merchandise from the foreign supplier? Note: For all requirements, do not round intermediate calculations. Negative amounts should be entered with a minus sign. b. Impact on net income c. Net cash outflow < Req A Rag and
Transcribed Image Text:On August 1, Pure Joy Corporation (a U.S.-based Importer) placed an order to purchase merchandise from a foreign supplier at a price of 400,000 pounds. Pure Joy will receive and make payment for the merchandise in three months on October 31. On August 1, Pure Joy entered into a forward contract to purchase 400,000 pounds in three months at a forward rate of $0.60 per pound. The company properly designates the forward contract as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured by referring to changes in the forward rate and, therefore, forward points are included in assessing hedge effectiveness. Relevant U.S. dollar exchange rates for the pound are as follows: Date August 1 September 30 October 31 Spot Rate $ 0.60 0.63 0.68 Forward Rate (to October 31) $ 0.60 0.66 N/A Pure Joy must close its books and prepare its third-quarter financial statements on September 30. The merchandise is received and paid for on October 31 and sold to local customers in November. Discounting to present value can be ignored. Required: a. Prepare journal entries for the foreign currency forward contract, foreign currency firm commitment, and import purchase. b. What is the impact on net income over the two accounting periods? c. What is the amount of net cash outflow resulting from the purchase of merchandise from the foreign supplier? Complete this question by entering your answers in the tabs below. Req A Req B and C b. What is the impact on net income over the two accounting periods? c. What is the amount of net cash outflow resulting from the purchase of merchandise from the foreign supplier? Note: For all requirements, do not round intermediate calculations. Negative amounts should be entered with a minus sign. b. Impact on net income c. Net cash outflow < Req A Rag and
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