On November 1, 20X6, Smith Imports Inc. contracted to purchase teacups from England for £30,000. The teacups were to be delivered on January 30, 20X7, with payment due on March 1, 20X7. On November 1, 20X6, Smith entered into a 120-day forward contract to receive 30,000 pounds at a forward rate of £1 = $1.59. The forward contract was acquired to hedge the financial component of the foreign currency commitment. Assume the company uses the forward rate in measuring the forward exchange contract and for measuring hedge effectiveness. Spot and exchange rates follow: Date Spot Rate Forward Rate for March 1, 20X7 November 1, 20X6 £1 = $1.61 £1 = $1.59 December 31, 20X6 £1 = 1.65 £1 = 1.62 January 30, 20X7 £1 = 1.59 £1 = 1.60 March 1, 20X7 £1 = 1.585 wh Which of the following journal entries as of December 31, 20X6 would appropriately reflect the accounting for this hedge as a fair value hedge?
Question 8
On November 1, 20X6, Smith Imports Inc. contracted to purchase teacups from England for £30,000. The teacups were to be delivered on January 30, 20X7, with payment due on March 1, 20X7. On November 1, 20X6, Smith entered into a 120-day forward contract to receive 30,000 pounds at a forward rate of £1 = $1.59. The forward contract was acquired to hedge the financial component of the foreign currency commitment.
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Assume the company uses the forward rate in measuring the forward exchange contract and for measuring hedge effectiveness.
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Spot and exchange rates follow:
Date Spot Rate Forward Rate
for March 1, 20X7November 1, 20X6 £1 = $1.61 £1 = $1.59 December 31, 20X6 £1 = 1.65 £1 = 1.62 January 30, 20X7 £1 = 1.59 £1 = 1.60 March 1, 20X7 £1 = 1.585 wh
Which of the following journal entries as of December 31, 20X6 would appropriately reflect the accounting for this hedge as a fair value hedge?
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