Euroam is a U.S. corporation that purchases motors from European manufacturers for distribution in the United States. A recent purchase involved the following events:
Dec. 1 | Purchased tractors from WMB Motors for SF4,000,000, payable in 45 days. Current exchange rate. $0.75 per Swiss franc. (Euroam uses the perpetual inventory system.) |
Dec. 31 | Made year-end adjusting entry relating to the SF4,000,000 account payable to WMB Motors. Current exchange rate, $0.78 per Swiss franc. |
Jan. 15 | Issued a check to World Bank for $3,080,000 in full payment of the account payable to WMB Motors. |
Instructions
a. Prepare in general journal form the entries necessary to record the preceding events.
b. Compute the exchange rate (price) of the Swiss franc in U.S. dollars on January 15.
c. Explain a hedging technique that Euroam might have used to protect itself from the possibility of losses resulting from a significant increase in the exchange rate for the Swiss franc.
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