Question

Hedged Sale Commitment and Exposed Asset Position, with Adjusting Entries On December 10, 2020, Robin Franchises, a U.S. company, received a purchase order from a U.K. customer for delivery of merchandise on January 15, 2021. The price of the merchandise is £10,000,000, payable on March 15, 2021, in pounds. To hedge its exposure to exchange rate changes, on December 10, 2020, Robin entered a forward contract for delivery of £10,000,000 to the broker on March 15, 2021. The merchandise was delivered as scheduled. On March 15, 2021, Robin received payment from the customer, and delivered the pounds to the broker to close the forward contract. Robin’s accounting year ends December 31. Exchange rates ($/£) are as follows: Spot rate Forward rate for delivery March 15, 2021 December 10, 2020 $1.3160 $1.3161 December 31, 2020 1.3162 1.3163 January 15, 2021 1.3165 1.3167 March 15, 2021 1.3180 -- Required Prepare the journal entries Robin Franchises made on January 15, 2021 and March 15, 2021 to record the above transactions, as well as its end-of-year adjusting entries on December 31, 2020. Date Description Debit Credit 12/31/20 Answer Answer 0 Answer 0 Answer Answer 0 Answer 0 To record loss on forward contract. Answer Answer 0 Answer 0 Answer Answer 0 Answer 0 To record gain on U.S. dollar value of the firm commitment. 1/15/21 Answer Answer 0 Answer 0 Answer Answer 0 Answer 0 To record loss on forward contract. Answer Answer 0 Answer 0 Answer Answer 0 Answer 0 To record gain or loss on U.S. dollar value of the firm commitment. Answer Answer 0 Answer 0 Answer Answer 0 Answer 0 To record delivery of goods to the customer. Answer Answer 0 Answer 0 Answer Answer 0 Answer 0 To adjust sales revenue for the change in value of the firm commitment. 3/15/21 Answer Answer 0 Answer 0 Answer Answer 0 Answer 0 To record gain or loss on accounts receivable. Answer Answer 0 Answer 0 Answer Answer 0 Answer 0 To record loss on forward contract. Answer Answer 0 Answer 0 Answer Answer 0 Answer 0 To record receipt of pounds from the U.K. customer. Cash Answer 0 Answer 0 Answer Answer 0 Answer 0 Answer Answer 0 Answer 0 To record delivery of the currency to the dealer, and settlement of the forward contract.

Answer 1

Journal entries in the books of Robin Franchises.

On 12/31/2020

Journal entry to record the end of the year adjustment in value of liability under the Forward Contract

Exchange Loss on Forward Contract Debit $ 2,000

Forward Contract Payable Credit $ 2,000

(to make the adjustment in the value of Forward Contract as on the Balance Sheet date. Forward rate on date of contract =1.3161, Forward rate on Balance Sheet date =1.3163. Additional notional rate (1.3163-1.3161 = 0.0002).Value of Forward Contract = $10,000,000.Additional notional payable amount =$10,000,000*0.0002=$2,000)

On 01/15/2021

Journal entry to record the revenue from the delivery of goods

Accounts receivable Debit $ 13,165,000

Revenue Credit $ 13,165,000

(revenue from the delivery of the merchandise is recorded at the Spot rate effective on the date of transaction.Spot rate on 01/15/2021 is 1.3165)

On 03/15/2021

Two transactions are effected on this date - (i) Receipt of the payment from the customer,and (ii) Settlement of the Forward Contract.

Journal entry for receipt of payment from the Customer

Bank account Debit $ 13,180,000

Gain on Foreign Exchange Credit    $ 15,000

Accounts Receivable Credit $13,165,000

(Receipt from the customer is recorded on the Spot rate as on 03/15/2021 and the excess amount received as compared to the amount recorded in Accounts receivable is treated as revenue)

Journal entry for Settlement of Forward Contract

Forward Contract Payable Debit $13,163,000

Exchange Loss on Forward Contract Credit   $ 2,000

Bank Account Credit $13,161,000

(To settle the Forward Contract at the original contract rate and reverse the notional loss booked on the Balance Sheet date of 12/31/2020)