Purchase with Forward Exchange Contract and Intervening Fiscal Year-EndPumped Up Company p...

Purchase with Forward Exchange Contract and Intervening Fiscal Year-End

Pumped Up Company purchased equipment from Switzerland for 140,000 francs on December 16, 20X7, with payment due on February 14, 20X8. On December 16, 20X7, Pumped Up also acquired a 60-day forward contract to purchase francs at a forward rate of SFr 1 = $0.67. On December 31, 20X7, the forward rate for an exchange on February 14, 20X8, is SFr 1 = $0.695. The spot rates were

Part I

Assume that the forward contract is not designated as a hedge but is entered into to manage the company’s foreign currency-exposed accounts payable.

a.Prepare journal entries for Pumped Up to record the purchase of equipment; all entries associ­ated with the forward contract; the adjusting entries on December 31, 20X7; and entries to record the revaluations and payment on February 14, 20X8.

b.What was the effect on the statement of income of the foreign currency transactions, including both the accounts payable and the forward contract, for the year ended December 31, 20X7?

c.What was the overall effect on the statement of income of these transactions from December 16, 20X7, to February 14, 20X8?

Part II

Now assume the forward contract is designated as a cash flow hedge of the variability of the future cash flows from the foreign currency account payable. The company uses the forward exchange rate to assess effectiveness.

Required

Prepare journal entries for Pumped Up to record the purchase of equipment; all entries associated with the forward contract; the adjusting and reclassification entries on December 31, 20X7; and entries to record the revaluations and payment on February 14, 20X8.