On August 1, Year 1, Zip Ltd. purchased some merchandise from a foreign company for DM450,000. The liability was not due until March 1, Year 2. Zip was quite confident that the exchange rate fluctuations were not a problem and took no action to hedge the liability. On November 1, Year 1, Zip looked at the exchange rates and decided that they had better hedge the liability with a 120-day forward contract. Assume a December 31 year-end, assume all months have 30 days, and assume hedge accounting is not adopted.

Required:
(a) Prepare all the journal entries for Years 1 and 2 for Zip for these transactions.
(b) Assume that the liability was a note due on March 1, Year 3 (instead of Year 2, as given above), and that Zip does not hedge in any way. Prepare all the journal entries for Year 1.
(c) Explain why some of the financial statement items in this problem are translated at historical rates whereas other items are translated at closing rates.

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EXCHANGE RATES August 1, Year 1 November 1, Year 1 November 1, Year 1 December 31, Year 1 December 31, Year 1 March 1, Year 2 December 31, Year 2 March 1, Year 3 Spot rate Spot rate 120-day forward rate Spot rate 60-day forward rate Spot rate Spot rate Spot rate $1 DM2.5 $1DM2.1 $1 DMI 1.9 $1 DM1.7 $1 DM1.8 $1 DM2.9 $1 DM2.4