XYZ, CO., placed an order for inventory costing 9,000,000 Euro with a foreign vendor on May 15 when the spot rate was 1 Euro = $1.165. XYZ received the goods on June 1 when the spot rate was 1 Euro = $1.173. Also on June 1, XYZ entered into a 90-day forward contract to purchase 9,000,000 Euro at a forward rate of 1 Euro = $1.182. Payment was made to the foreign vendor on September 1 when the spot rate was 1 Euro= $1.20. XYZ has a June 30 year-end. On that date, the spot rate was 1 Euro = $1.18, and the forward rate on the contract was 1 Euro= $1.187. Changes in the current value of the forward contract is measured as the present value of the changes in the forward rates over time and no separate accounting is given the time value of the contract. The relevant discount rate is 6%. Prepare all relevant journal entries suggested by the above facts assuming that the hedge is designated as a fair value hedge.
XYZ, CO., placed an order for inventory costing 9,000,000 Euro with a foreign vendor on May 15 when
the spot rate was 1 Euro = $1.165. XYZ received the goods on June 1 when the spot rate was 1 Euro =
$1.173. Also on June 1, XYZ entered into a 90-day forward contract to purchase 9,000,000 Euro at a
forward rate of 1 Euro = $1.182. Payment was made to the foreign vendor on September 1 when the
spot rate was 1 Euro= $1.20. XYZ has a June 30 year-end. On that date, the spot rate was 1 Euro =
$1.18, and the forward rate on the contract was 1 Euro= $1.187. Changes in the current value of the
forward contract is measured as the present value of the changes in the forward rates over time and no
separate accounting is given the time value of the contract. The relevant discount rate is 6%.
Prepare all relevant
as a fair value hedge.
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