Fair Value Hedge Illustration-Forward Contract Consider the following information: 1. On December 1, 2008, a U.S. firm
Question:
1. On December 1, 2008, a U.S. firm contracts to sell equipment (with an asking price of 1,000,000 pesos) in Mexico. The firm will take delivery and will pay for the equipment on March 1, 2009.
2. On December 1, 2008, the company enters into a forward contract to sell 1,000,000 pesos for $0.0948 on March 1, 2009.
3. Spot rates and the forward rates for March 1, 2009, settlement were as follows (dollars per peso):
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4. On March 1, the equipment was sold for 1,000,000 pesos. The cost of the equipment was $40,000.
Required:
Prepare all journal entries needed on December 1, December 31, and March 1 to account for the forward contract, the firm commitment, and the transaction to sell theequipment.
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Step by Step Answer:
Alternative entries are presented assuming the forward contract is not formally recorded on the book...View the full answer
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