Accounting for forward foreign exchange contract as a fair value hedge and a cash flow hedge. On October 1, 2008, Owens Corporation places an order with a European supplier for manufacturing equipment for delivery on June 30, 2009. The purchase is denominated in euros in the amount of €60,000. Owens Corporation purchases a forward foreign exchange contract on October 1, 2008, for the purchase of €60,000 at a forward foreign exchange rate for settlement on June 30, 2009, of €1 = $1.32. Owens Corporation designates the forward foreign exchange contract as a fair value hedge. The forward foreign exchange rate on December 31, 2008, for settlement on June 30, 2009, is €l = $1.35, and the actual exchange rate on June 30, 2009, 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 wou1d make on October 1, 2008; December 31, 2008; and June 30, 2009; to account for the purchase commitment and the forward foreign exchange 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 foreign exchange contract as a cash flow hedge instead of a fair value hedge?
c. Suggest a scenario that would justify the firm treating the forward foreign exchange contract as a fair value hedge, and a scenario that would justify treating it as a cash flowhedge.

Type of Exchange Rate Equivalent Amount in Euros Exchange Rate U.S. Dollar Amount Date October 1, 2008 . Forward for June 30, 2009, 1 - $1.32 60,000 $79,200 Settlement Forward for June 30, 2009, December 31, 2008. $1 - 1.35 60,000 $81,000 Settlement Actual June 30, 2009 . 1 - $1.40 60,000 S84,000