On June 1, 20x7, a company placed an order for equipment with a British manufacturer. The price
Question:
On June 1, 20x7, a company placed an order for equipment with a British manufacturer. The price of the equipment is £825,000. The equipment is expected to be delivered on April 30, 20x8, at which time the payment is due. In order to protect itself from fluctuations in interest rates, the company entered into a forward contract to purchase
£825,000 on April 30, 20x8, at 1£ = $1.29. At December 31, 20x7, the forward rate for a four-month forward contract ending on April 30, 20x8, was 1£ = $1.35 and the spot rate was 1£= $1.32. No entries were made relative to this contract. The company decided on June 1, 20x7 to use hedge accounting and wishes to classify it as a cash flow hedge.
Required – Prepare the journal entry relating to this transaction at December 31, 20x7.
