A U.S. company purchases merchandise from a Hong Kong supplier on a regular basis. The following events
Question:
A U.S. company purchases merchandise from a Hong Kong supplier on a regular basis. The following events occur:
• October 1, 2017: The company signed a forward contract to purchase HK$1,000,000 for delivery on May 1, 2018, in anticipation of an expected payment of HK$ for a forecasted merchandise purchase.
• December 1, 2017: The company issued a purchase order for HK$1,000,000 in merchandise from the supplier.
• March 1, 2018: The company took delivery of the merchandise.
• May 1, 2018: The company closed the forward contract and paid the supplier.
• May 31, 2018: The company sold the merchandise to a U.S. customer for $200,000.
The company’s accounting year ends December 31.
Exchange rates ($/HK$) are as follows:
Spot rate | Forward rate for delivery 5/1/2018 | |
October 1, 2017 | $0.125 | $0.127 |
December 1, 2017 | 0.127 | 0.1285 |
December 31, 2017 | 0.128 | 0.131 |
March 1, 2018 | 0.131 | 0.1317 |
May 1, 2018 | 0.132 | 0.132 |
Instructions
Prepare the journal entries to record the above transactions, including necessary adjusting entries. Assume the hedge qualifies for hedge accounting.
Financial Accounting
ISBN: 978-0077862268
2nd edition
Authors: J. David Spiceland, Wayne Thomas, Don Herrmann