On November 1, 20X6, Smith Imports Incorporated contracted to purchase teacups from England for £50,000. 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 50,000 pounds at a forward rate of £1 = $1.55. The forward contract was acquired to hedge the financial component of the foreign currency commitment. Additional Information for the Exchange Rate 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 = $1.60 £1 = $ 1.55 December 31, 20X6 £1 = 1.63 £1 = 1.60 January 30, 20X7 £1 = 1.55 £1 = 1.56 March 1, 20X7 £1 = 1.545 Required: b. Prepare all journal entries from November 1, 20X6, through March 1, 20X7, for the purchase of the teacups, the forward exchange contract, and the foreign currency transaction. Assume Smith’s fiscal year ends on December 31, 20X6. c. Assume that interest is significant and the time value of money is considered in valuing the forward contract and hedged commitment. Use a 12 percent annual interest rate. Prepare all journal entries from November 1, 20X6, through March 1, 20X7, for the purchase of the teacups, the forward exchange contract, and the foreign currency transaction. Assume Smith’s fiscal year ends on December 31, 20X7.
On November 1, 20X6, Smith Imports Incorporated contracted to purchase teacups from England for £50,000. 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 50,000 pounds at a forward rate of £1 = $1.55. The forward contract was acquired to hedge the financial component of the foreign currency commitment. Additional Information for the Exchange Rate 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 = $1.60 £1 = $ 1.55 December 31, 20X6 £1 = 1.63 £1 = 1.60 January 30, 20X7 £1 = 1.55 £1 = 1.56 March 1, 20X7 £1 = 1.545 Required: b. Prepare all journal entries from November 1, 20X6, through March 1, 20X7, for the purchase of the teacups, the forward exchange contract, and the foreign currency transaction. Assume Smith’s fiscal year ends on December 31, 20X6. c. Assume that interest is significant and the time value of money is considered in valuing the forward contract and hedged commitment. Use a 12 percent annual interest rate. Prepare all journal entries from November 1, 20X6, through March 1, 20X7, for the purchase of the teacups, the forward exchange contract, and the foreign currency transaction. Assume Smith’s fiscal year ends on December 31, 20X7.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
On November 1, 20X6, Smith Imports Incorporated contracted to purchase teacups from England for £50,000. 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 50,000 pounds at a forward rate of £1 = $1.55. The forward contract was acquired to hedge the financial component of the foreign currency commitment.
Additional Information for the Exchange Rate
- 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 = $1.60 | £1 = $ 1.55 |
| December 31, 20X6 | £1 = 1.63 | £1 = 1.60 |
| January 30, 20X7 | £1 = 1.55 | £1 = 1.56 |
| March 1, 20X7 | £1 = 1.545 |
Required:
b. Prepare all
c. Assume that interest is significant and the time value of money is considered in valuing the forward contract and hedged commitment. Use a 12 percent annual interest rate. Prepare all journal entries from November 1, 20X6, through March 1, 20X7, for the purchase of the teacups, the forward exchange contract, and the foreign currency transaction. Assume Smith’s fiscal year ends on December 31, 20X7.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education