Commitment to purchase a machine

Tom Company , on November 1, 2020, contracts to purchase a machine for $300,000 from for Company

The machine will be delivered January 30, 2021, and payment is due March 1, 2021, The year end is December 31.

Tom Co. hedges the commitment right away and designates this as a cash flow hedge.

Tom Co. will accounts for the hedge using the gross method.

Rates: Spot rate Forward rate to Mar. 1, 2021

Sign contract Nov.1 $1 = 1.500 1.510

Year-end Dec. 31 $1 1.505 1.513

Delivery date Jan. 30 $1 1.520 1.534

Settlement date Mar.1 $1 1.540

Required:

Prepare all journal entries related to the hedge and the underlying purchase or sale.

Use the gross method ( record the hedge using a JE; not a memorandum entry )

Prepare journal entries in standard form.

Standard form is:

Date Account PR Debit Credit

Jan. 15 Equipment 130,000

Cash 130,000

( Purchase equipment for cash)

Answer rating: 100% (QA)

Designation of hedge Nov 1 Currency Hedge 10000 Equipment 300000 Cash 310000 Purchased Equipment and ... View the full answer