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 1,036,000 Polish zlotys (PLN).  Mertag enters into a forward contract on October 1, 2020, to sell PLN 1,036,000 in four months (on January 31, 2021).  U.S. dollar -Polish zloty exchange rates are as follows: Date                         Spot Rate         Forward Rate October 1, 2020            .25               .29 December 31, 2020      .28               .32 January 31, 2021          .30               N/A   Mertag designates the forward contract as a fair value hedge of a foreign firm commitment.  The fair value of the firm commitment is measured by referring to changes in the forward rate, and, therfore, 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. A.  Prepare journal entries for the foreign currency forward contract, foreign currency firm commitment, and export sale. B.  Determine the net benefit, if any, realized by Mertag from entering into the forward contract.

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Chapter1: Financial Statements And Business Decisions
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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 1,036,000 Polish zlotys (PLN).  Mertag enters into a forward contract on October 1, 2020, to sell PLN 1,036,000 in four months (on January 31, 2021).  U.S. dollar -Polish zloty exchange rates are as follows:

Date                         Spot Rate         Forward Rate

October 1, 2020            .25               .29

December 31, 2020      .28               .32

January 31, 2021          .30               N/A

 

Mertag designates the forward contract as a fair value hedge of a foreign firm commitment.  The fair value of the firm commitment is measured by referring to changes in the forward rate, and, therfore, 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.

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

B.  Determine the net benefit, if any, realized by Mertag from entering into the forward contract.  

 

Determine the net benefit, if any, realized by Mertag from entering into the forward contract. (Do not round intermediate
calculations. Negative amount should be entered with a minus sign.)
Net benefit
$ 310,800 8
Transcribed Image Text:Determine the net benefit, if any, realized by Mertag from entering into the forward contract. (Do not round intermediate calculations. Negative amount should be entered with a minus sign.) Net benefit $ 310,800 8
No
Date
General Journal
Debit
Credit
10/01/2020
No journal entry required
10/01/2020
No journal entry required
12/31/2020
Forward contract
31,080
Foreign exchange gain or loss
31,080
12/31/2020
Foreign exchange gain or loss
31,080
Firm commitment
31,080
01/31/2021
Forward contract
20,720
Foreign exchange gain or loss
20,720
6.
01/31/2021
Foreign exchange gain or loss
20,720
Firm commitment
20,720
7
01/31/2021
Foreign currency (PLN)
310,800
Cash
259,000 8
Forward contract
51,800
8
01/31/2021
Inventory
310,800 8
Foreign currency (PLN)
310,800
01/31/2021
Firm commitment
51,800
Foreign exchange gain or loss
51,800
2.
3.
Transcribed Image Text:No Date General Journal Debit Credit 10/01/2020 No journal entry required 10/01/2020 No journal entry required 12/31/2020 Forward contract 31,080 Foreign exchange gain or loss 31,080 12/31/2020 Foreign exchange gain or loss 31,080 Firm commitment 31,080 01/31/2021 Forward contract 20,720 Foreign exchange gain or loss 20,720 6. 01/31/2021 Foreign exchange gain or loss 20,720 Firm commitment 20,720 7 01/31/2021 Foreign currency (PLN) 310,800 Cash 259,000 8 Forward contract 51,800 8 01/31/2021 Inventory 310,800 8 Foreign currency (PLN) 310,800 01/31/2021 Firm commitment 51,800 Foreign exchange gain or loss 51,800 2. 3.
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