Mar, a U.S. firm, purchased equipment for 400,000 British pounds from Thc on December 16, 2011. The terms were n/30, payable in British pounds.
On December 16, 2011, Mar also entered into a 30-day forward contract to hedge the account payable to Thc. The forward contract is settled net. Exchange rates for British pounds on selected dates are as follows:
| 12/16/11 | 12/31/11 | 1/15/12 |
Spot rate | $1.67 | $1.65 | $1.64 |
Forward rate for 1/15/12 | $1.68 | $1.66 | $1.64 |
REQUIRED
1. Assuming this situation qualifies as a cash-flow hedge, prepare journal entries on December 16, 2011, to record Mar’s purchase and the forward contract. A 6 percent interest rate is appropriate.
2. Prepare year-end journal entries for Mar as needed on December 31, 2011.
3. Prepare journal entries for Mar’s settlement of its accounts payable and the forward contract on January 15, 2012.
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