Commitment to purchase a machine Tom Company , on November 1, 2020, contracts to purchase a machine
Question:
Commitment to purchase a machine
Tom Company , on November 1, 2020, contracts to purchase a machine for $300,000 from for Company
The machine will be delivered January 30, 2021, and payment is due March 1, 2021, The year end is December 31.
Tom Co. hedges the commitment right away and designates this as a cash flow hedge.
Tom Co. will accounts for the hedge using the gross method.
Rates: Spot rate Forward rate to Mar. 1, 2021
Sign contract Nov.1 $1 = 1.500 1.510
Year-end Dec. 31 $1 1.505 1.513
Delivery date Jan. 30 $1 1.520 1.534
Settlement date Mar.1 $1 1.540
Required:
Prepare all journal entries related to the hedge and the underlying purchase or sale.
Use the gross method ( record the hedge using a JE; not a memorandum entry )
Prepare journal entries in standard form.
Standard form is:
Date Account PR Debit Credit
Jan. 15 Equipment 130,000
Cash 130,000
( Purchase equipment for cash)
Cornerstones of Financial and Managerial Accounting
ISBN: 978-1111879044
2nd edition
Authors: Rich, Jeff Jones, Dan Heitger, Maryanne Mowen, Don Hansen