On August 1, Jackson Corporation (a U.S.-based importer) placed an order to purchase merchandise from a foreign supplier at a price of 200,000 rupees. Jackson will receive and make payment for the merchandise in three months on October 31. On August 1, Jackson entered into a forward contract to purchase 200,000 rupees in three months at a forward rate of $0.30. It properly designates the forward contract as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured by referring to changes in the forward rate. Relevant exchange rates for the rupee are as follows:

Jackson€™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. Jackson must close its books and prepare its third-quarter financial statements on September 30.
a. Prepare journal entries for the forward contract and firm commitment.
b. What is the impact on net income over the two accounting periods? What net cash outflow results from the purchase of merchandise from the foreigncustomer?

Transcribed Image Text:

Date August 1 September 30 October 31 Spot Rate 50.300 0.305 0.320 Forward Rate (to October 31) $0.300 0.325 NA