On October 1, 2020, Mertag Company (a U.S.-based company) receives an order from a customer in Poland to deliver goods on January 31, 2021, for a price of 1,030,000 Polish zlotys (PLN). Mertag enters into a forward contract on October 1, 2020, to sell PLN 1,030,000 in four months (on January 31, 2021). U.S. dollar–Polish zloty exchange rates are as follows: DateSpot RateForward Rate(to January 31, 2021)October 1, 2020$0.26 $0.30 December 31, 2020 0.29 0.33 January 31, 2021 0.31 N/A Mertag 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. Mertag must close its books and prepare financial statements on December 31. Discounting to present value can be ignored. Prepare journal entries for the foreign currency forward contract, foreign currency firm commitment, and export sale. **Title: Journal Entries for Foreign Currency Forward Contracts****Objective:**Understand how to prepare journal entries for foreign currency forward contracts, firm commitments, and export sales. Follow these steps to ensure accurate financial reporting.**Instructions:**1. **Record the Sales Agreement:** - Document the initial sales agreement in the books.2. **Record Forward Contract:** - Enter the details of the forward contract entered by Mertag Company.3. **Recognize Change in Forward Contract Fair Value:** - Regularly assess and record changes in the fair value of the forward contract.4. **Recognize Change in Firm Commitment Fair Value:** - Evaluate and document changes in the firm commitment's fair value over time.5. **Adjust Fair Value of Forward Contract:** - Make necessary adjustments to align the forward contract value with current fair values.6. **Adjust Fair Value of the Firm Commitment:** - Update the firm commitment account to reflect its fair value accurately.**Note:**If no journal entry is required for any transaction/event, select "No journal entry required" in the first account field. Avoid rounding intermediate calculations to maintain precision.By following these procedures, companies can monitor and adjust their financial standings in relation to foreign currency transactions effectively. **Instructions for Preparing Journal Entries**For this task, you are to prepare journal entries related to a foreign currency forward contract, a foreign currency firm commitment, and an export sale. Follow the guidelines below when completing your entries:- **Do not round intermediate calculations.**- If no journal entry is needed for a specific transaction or event, select "No journal entry required" in the first account field.### Transaction Steps:1. **Record the Firm Commitment:** - Recognize any changes in fair value. 2. **Adjust Fair Value of the Forward Contract:** - Make necessary journal entries to account for changes in fair value. 3. **Adjust Fair Value of the Firm Commitment:** - Record entries to reflect adjustments in fair value. 4. **Record Sale and Receipt of PLN:** - Document the sale and receipt of the Polish Zloty (PLN). 5. **Settle Forward Contract:** - Record the completion and settlement of the forward contract. 6. **Close Firm Commitment:** - Make the final entry to close the firm commitment.Each step might require adjustments in both the debit and credit accounts. Ensure accuracy to reflect true financial positions and changes.

A journal entry is a form of accounting entry that is used to report a business transaction in a…

Answered: On October 1, 2020, Mertag Company (a…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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On October 1, 2020, Mertag Company (a U.S.-based company) receives an order from a customer in Poland to deliver goods on January 31, 2021, for a price of 1,030,000 Polish zlotys (PLN). Mertag enters into a forward contract on October 1, 2020, to sell PLN 1,030,000 in four months (on January 31, 2021). U.S. dollar–Polish zloty exchange rates are as follows:

Date	Spot Rate	Forward Rate (to January 31, 2021)
October 1, 2020	$	0.26	$	0.30
December 31, 2020		0.29		0.33
January 31, 2021		0.31		N/A

Mertag 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. Mertag must close its books and prepare financial statements on December 31. Discounting to present value can be ignored.

Prepare journal entries for the foreign currency forward contract, foreign currency firm commitment, and export sale.

**Title: Journal Entries for Foreign Currency Forward Contracts**

**Objective:**
Understand how to prepare journal entries for foreign currency forward contracts, firm commitments, and export sales. Follow these steps to ensure accurate financial reporting.

**Instructions:**

1. **Record the Sales Agreement:**
- Document the initial sales agreement in the books.

2. **Record Forward Contract:**
- Enter the details of the forward contract entered by Mertag Company.

3. **Recognize Change in Forward Contract Fair Value:**
- Regularly assess and record changes in the fair value of the forward contract.

4. **Recognize Change in Firm Commitment Fair Value:**
- Evaluate and document changes in the firm commitment's fair value over time.

5. **Adjust Fair Value of Forward Contract:**
- Make necessary adjustments to align the forward contract value with current fair values.

6. **Adjust Fair Value of the Firm Commitment:**
- Update the firm commitment account to reflect its fair value accurately.

**Note:**
If no journal entry is required for any transaction/event, select "No journal entry required" in the first account field. Avoid rounding intermediate calculations to maintain precision.

By following these procedures, companies can monitor and adjust their financial standings in relation to foreign currency transactions effectively.

**Instructions for Preparing Journal Entries**

For this task, you are to prepare journal entries related to a foreign currency forward contract, a foreign currency firm commitment, and an export sale. Follow the guidelines below when completing your entries:

- **Do not round intermediate calculations.**
- If no journal entry is needed for a specific transaction or event, select "No journal entry required" in the first account field.

### Transaction Steps:

1. **Record the Firm Commitment:**
- Recognize any changes in fair value.

2. **Adjust Fair Value of the Forward Contract:**
- Make necessary journal entries to account for changes in fair value.

3. **Adjust Fair Value of the Firm Commitment:**
- Record entries to reflect adjustments in fair value.

4. **Record Sale and Receipt of PLN:**
- Document the sale and receipt of the Polish Zloty (PLN).

5. **Settle Forward Contract:**
- Record the completion and settlement of the forward contract.

6. **Close Firm Commitment:**
- Make the final entry to close the firm commitment.

Each step might require adjustments in both the debit and credit accounts. Ensure accuracy to reflect true financial positions and changes.

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