Western Drugs Company, a U.S company, sells Niacin (a raw material used in development of drugs) on
Question:
Western Drugs Company, a U.S company, sells Niacin (a raw material used in development of drugs) on December 1, Year 1, to Eastern Pharma Inc. in India. Eastern Pharma agreed to pay with a payment of 20,000,000 rupees (Rs) to Western Drugs on January 31, Year 2. Western Drugs enters into a forward contract on December 1, Year 1, to sell Rs. 20,000,000 on January 31, Year 2 to hedge the foreign currency risk. Relevant exchange rates for the rupees (Rs.) on various dates are as follows:
Date | Spot Rate | Forward Rate (to January 31, Year 2) |
December 1, Year 1 | $0.0133 | $0.0134 |
December 31, Year 1 | $0.0135 | $0.0130 |
January 31, Year 2 | $0.0125 |
Western Drug’s incremental borrowing rate is 12 percent. The present value factor for one month at an annual interest rate of 12 percent (1 percent per month) is 0.9901. Western Drugs has a fiscal year end on December 31.
Required: Assuming that Western Drugs designates the forward contract as a fair value hedge of a foreign currency receivable, prepare all relevant journal entries for these transactions in U.S. dollars for Year 1 and Year 2.
Financial Accounting For Management
ISBN: 9789385965661
4th Edition
Authors: Neelakantan Ramachandran, Ram Kumar Kakani