Europa-West is a U.S. corporation that purchases automobiles from European manufacturers for distribution in the United States. A recent purchase involved the following events:
Nov. 12 | Purchased automobiles from Stockholm Motors in Swedish kronor for Sk20,000,000. payable in 60 days. Current exchange rate. $0.12745 per krona. (Europa-West uses the perpetual inventory system.) |
Dec. 31 | Made year-end adjusting entry relating to the Sk20,000,000 account payable to Stockholm Motors. Current exchange rate. $0.12874 per krona. |
Jan. 11 | Issued a check to World Bank for $2,566,800 in full payment of the account payable to Stockholm Motors. |
Instructions
a. Prepare in general journal form the entries necessary to record the preceding events.
b. Compute the exchange rate (price) of the krona in U.S. dollars on January 11.
c. Explain a hedging technique that Europa-West might have used to protect itself from the possibility of losses resulting from a significant increase in the exchange rate for the krona.
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