Question

Hedging Exposed Asset Position with Adjusting Entries

On November 3, 2020, Robin Franchises, a U.S. company, sold merchandise to a franchisee in the U.K., at a price of £8,000,000, payable in three months in pounds. To hedge its exposed asset position, on November 3, 2020, Robin entered a forward contract for delivery of £8,000,000 to the broker on February 3, 2021. On February 3, 2021, Robin received payment from the franchisee, and delivered the pounds to the broker to close the forward contract. Robin’s accounting year ends December 31. Exchange rates ($/£) are as follows:

November 3, 2020 December 31, 2020 February 3, 2021 Spot rate $ 1.3168 1.3164 1.3162 Forward rate for delivery February 3, 2021 $1.3166 1.3163 a. Prepare the journal entries Robin Franchises made on November 3, 2020 and February 3, 2021, as well as the required end of year adjusting entry. Debit 10,534,000 X O Credit 0 10,400 x 12,920,000 x 0 0 OX ox 0 0 0x X 0 General Journal Date Description 11/03/20 Accounts receivable Sales revenue To record sale to franchisee. 12/31/20 Exchange loss Accounts receivable To restate the receivable. Investment in forward contrac Exchange gain To restate the forward contract. 02/03/21 Exchange loss Accounts receivable To restate the receivable. Investment in forward contrac Exchange gain To restate the forward sale contract. Foreign currency Accounts receivable To record receipt of payment from franchisee. Cash Investment in forward contri Foreign currency To record settlement of the forward sale contract. x 0 X Ox 0 0 0 x ox 0 0 0 x 0 x 0

Answer 1

1)

11-03-20	Accounts receivable	$        1,05,34,400
	Sales revenue		$        1,05,34,400
	(To record sales to franchise)
12/31/20	Exchange loss (8000000*(1.3168-1.3164))	$                    3,200
	Accounts receivable		$                    3,200
	(To restate the receivable)
	Investment in forward contract (8000000*(1.3166-1.3163)	$                    2,400
	Exchange gain		$                    2,400
	(To restate the forward contract)
02-03-21	Exchange loss (8000000*(1.3164-1.3162))	$                    1,600
	Accounts receivable		$                    1,600
	(To restate the receivable)
	Investment in forward contract (8000000*(1.3163-1.3162))	$                        800
	Exchange gain		$                        800
	(To restate the forward contract)
	Foreign currency (10534400-3200-1600)	$        1,05,29,600
	Accounts receivable		$        1,05,29,600
	(To record receipt of payment from franchise)
	Cash (8000000*1.3166)	$        1,05,32,800
	Investment in forward contract (2400+800)		$                    3,200
	Foreign currency		$        1,05,29,600
	(To record settlement of forward sale contract)

2) Gain of $3,200 by investing in forward contract.