Question

On July 1, 2013, Owens Corporation places an order with a European supplier for manufacturing equipment for delivery on June 30, 2014. The purchase is denominated in euros in the amount of €60,000. Owens Corporation purchases a forward currency contract on July 1, 2013, for the purchase of €60,000 at a forward exchange rate for settlement on June 30, 2014, of €1 = $1.32. Owens Corporation designates the forward contract as a fair value hedge. The forward exchange rate on December 31, 2013, for settlement on June 30, 2014, is €1 = $1.35, and the actual exchange rate on June 30, 2014, is €1 = $1.40. The following summarizes this information:


a. Using a discount rate of 8% per year, give the journal entries that Owens Corporation would make on July 1, 2013, December 31, 2013, and June 30, 2014, to account for the purchase commitment and the forward contract. Owens Corporation’s accounting period is the calendar year.
b. How would the journal entries in part a differ if Owens Corporation designates the forward contract as a cash flow hedge instead of a fair value hedge?
c. Suggest a scenario that would justify the firm treating the forward contract as a fair value hedge and a scenario that would justify treating it as a cash flowhedge.


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  • CreatedMarch 04, 2014
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