Question

As a result of its export sales to customers in Switzerland, the Lenox Company has had Swiss franc denominated revenues over the past number of years. In order to gain protection from future exchange rate fluctuations, the company decides to borrow its current financing requirements in Swiss francs. Accordingly, on January 1, Year 1, it borrows SF1,400,000 at 12% interest, to be repaid in full on December 31, Year 3. Interest is paid annually on December 31. The management designates this loan as a cash flow hedge of future SF revenues, which are expected to be received as follows:
Year 1 ......... SF 560,000
Year 2 ......... 490,000
Year 3......... 350,000
SF1, ......... 400,000
Actual revenues turned out to be exactly as expected each year and were received in cash. Exchange rates for the Swiss franc during the period were as follows:
January 1, Year 1......... $1.05
Average, Year 1......... $1.10
December 31, Year 1......... $1.15
Average, Year 2......... $1.20
December 31, Year 2......... $1.25
Average, Year 3......... $1.27
December 31, Year 3......... $1.30
Required:
Prepare the journal entries required each year.


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  • CreatedJune 09, 2015
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