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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 1,026,000 Polish zlotys (PLN). Mertag enters into a forward contract on October 1, 2020, to sell PLN 1,026,000 in four months (on January 31, 2021). U.S. dollar-Polish zloty exchange rates are as follows: Date October 1, 2020 December 31, 2020 January 31, 2021 Spot Rate S Forward Rate (to January 31, 2021) 0.27 0.30 0.32 S 0.31 0.34 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. Required: Prepare journal entries for the foreign currency forward contract, foreign currency firm commitment, and export sale. Please explain the steps and which rate to choose and why Thanks

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 1,026,000 Polish zlotys (PLN). Mertag enters into a forward contract on October 1, 2020, to sell PLN 1,026,000 in four months (on January 31, 2021). U.S. dollar-Polish zloty exchange rates are as follows: Date October 1, 2020 December 31, 2020 January 31, 2021 Spot Rate S Forward Rate (to January 31, 2021) 0.27 0.30 0.32 S 0.31 0.34 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. Required: Prepare journal entries for the foreign currency forward contract, foreign currency firm commitment, and export sale. Please explain the steps and which rate to choose and why Thanks

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 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 1,026,000 Polish zlotys (PLN). Mertag enters into a forward contract on October 1, 2020, to sell PLN 1,026,000 in four months (on January 31, 2021). U.S. dollar-Polish zloty exchange rates are as follows: Date October 1, 2020 December 31, 2020 January 31, 2021 Spot Rate $ Forward Rate (to January 31, 2021) 0.27 0.30 0.32 $ 0.31 0.34 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. Required: Prepare journal entries for the foreign currency forward contract, foreign currency firm commitment, and export sale. Please explain the steps and which rate to choose and why Thanks
Transcribed Image Text: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 1,026,000 Polish zlotys (PLN). Mertag enters into a forward contract on October 1, 2020, to sell PLN 1,026,000 in four months (on January 31, 2021). U.S. dollar-Polish zloty exchange rates are as follows: Date October 1, 2020 December 31, 2020 January 31, 2021 Spot Rate $ Forward Rate (to January 31, 2021) 0.27 0.30 0.32 $ 0.31 0.34 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. Required: Prepare journal entries for the foreign currency forward contract, foreign currency firm commitment, and export sale. Please explain the steps and which rate to choose and why Thanks
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