On October 15, 2004, Zap Limited sold merchandise to two companies in Portugal. In the first transaction, the price was 3,000,000 escudos and was to be paid in 90 days. Worried about the exposure to the exchange risk, the company hedged the receivable for a 90-day period with a forward contract.

In the second transaction, the price was 3,600,000 escudos and the date of payment was November 15, 2007. Due to the difficulty of getting a forward contract to match the date payment is due, the company decided to remain in an “unhedged” position on this receivable.

Exchange rates (for purposes of this question, all months have 30 days):

Required:

Ignoring closing entries:

a. Prepare all the related journal entries required for the first sale for 2004 and 2005.

b. Assuming instead that the company had not hedged the receivable from the first sale in any way, prepare the appropriate journal entries for 2004 and 2005 to record this situation.

c. Prepare all the related journal entries for the second sale for 2004 and 2005.

Transcribed Image Text:

October 15, 2004, spot rate December 31, 2004, spot rate January 13, 2005, spot rate October 15, 2004, forward 90-day rate December 31, 2005, spot rate $1 = 800 escudos $1 - 910 escudos $1 - 945 escudos $1 - 926 escudos $1 =775 escudos