Question

On October 1, 2017, Sharp Company (based in Denver, Colorado) entered into a forward contract to sell 110,000 rubles in four months (on January 31, 2018) and receive $44,000 in U.S. dollars. Exchange rates for the ruble follow:

Date	Spot Rate			Forward Rate (to January 31, 2018)
October 1, 2017	$	0.36		$	0.40
December 31, 2017		0.39			0.42
January 31, 2018		0.41			N/A

Sharp's incremental borrowing rate is 12 percent. The present value factor for one month at an annual interest rate of 12 percent (1 percent per month) is 0.9901. Sharp must close its books and prepare financial statements on December 31.

1. Prepare journal entries, assuming that Sharp entered into the forward contract as a fair value hedge of a 110,000 ruble receivable arising from a sale made on October 1, 2017. Include entries for both the sale and the forward contract.
2. Prepare journal entries, assuming that Sharp entered into the forward contract as a fair value hedge of a firm commitment related to a 110,000 ruble sale that will be made on January 31, 2018. Include entries for both the firm commitment and the forward contract. The fair value of the firm commitment is measured by referring to changes in the forward rate.

Answer 1

Answer:-

1. Journal Entry for Forward Contract hedge

Date	Particulars	Debit($)	Credit($)
1-Oct	Accounts receivable	39,600
	To Sales ( 110,000 x 0.36)		39,600
	There is no formal entry for the forward contract.
31-Dec	Accounts Receivable	3,300
	To Foreign Exchange gain (($0.39-$0.36) x 110,000)		3,300
	Loss on forward contract	2,178.22
	To Forward Contract (($ 0.42-$ 0.40) x 110,000)=2,200 2,200 x 0.9901=1980.20		2178.22
31-Jan	Accounts Receivable (LCU)	2,200
	To Foreign Exchange gain (($ 0.41-$0.39) x 110,000)		2,200
	Forward Contract	1,078.22
	To Gain on forward contract (($0.41-$0.40) x 110,000=1100(loss) 1100(loss)-2,178.22(recognized earlier now reversed)		1,078.22
	Foreign Currency	40000
	To Accounts receivable(39,600+3,300+2,200)		45,100
	Cash	44,000
	Forward Contract	1,100
	To Foreign Currency (LCU)		45,100

2. Journal Entry for Forward Contract hedge of a firm commitment

Date	Particulars	Debit($)	Credit($)
1-Oct	There is no formal entry for the forward contract or firm commitment
31-Dec	Loss on forward contract	2,178.22
	To Forward Contract (($ 0.42-$ 0.40) x 110,000) x 0.9901=2,178.22		2,178.22
		2,178.22
	Firm Commitment
	To Gain on firm Commitment (($ 0.42-$ 0.40) x 110,000) x 0.9901=2,178.22		2,178.22
31-Jan	Forward Contract	1,078.22
	To Gain on forward contract (($0.41-$0.40)x 110,000=1,100(loss 1,100(loss)-2,178.22(recognized earlier now reversed)		1,078.22
	Loss on firm commitment	1,078.22
	To Firm Commitment		1,078.22
	Foreign Currency	45,100
	To Sales		45,100
	Cash	44,000
	Forward Contract	1,100
	To Foreign Currency		45,100
	Sales	1,100
	To Firm Commitment		1,100

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