On  June  1, Year 3, Morgan Enterprises  contracted to purchase merchandise from a Vendor in Europe at a purchase price of  Euro 600,000. The contract called for the merchandise to be delivered to Morgan on  September 30, Year 3 with payment due on delivery.  On June 1, Year 3, Morgan  arranged a forward contract to purchase  Euro 600,000 on September  30, Year 3, at a rate of  Euro 1 = $1.52. Milton’s year end is August 31.

The merchandise was delivered on September 30, Year 3 and  Euro 600,000 were purchased from the bank and delivered to the Vendor.

Exchange rates were as follows:

	Spot Rates	Forward Rates
June 1, Year 3	Euro 1 = $1.43	Euro 1 = $1.52
August 31, Year 3	Euro 1 = $1.50	Euro 1 = $1.54
September 30, Year 3	Euro 1 = $1.51	Euro  1 = $1.51

Required:

• Prepare the journal entries that Morgan should make to record the events described assuming that the forward contract is designated as a cash flow hedge.
• Prepare a partial trial balance of the accounts used as a August 31, Year 3. And indicate how each would appear on the company’s financial statements.
• Prepare the journal entries that  Morgan should make to record the events described assuming that the forward contract is designated as a fair value hedge.
• Prepare a partial trial balance of the accounts used as at August  31, Year 3 and indicate how each would appear on the company’s financial statements.
• Describe how accounting for the hedge affects the current ratio and indicate which accounting treatment for the hedge would show the strongest liquidity position.

Answer rating: 100% (QA)

a June 1 Forward contract receivable912000 Forward contract payable912000 To record the forward contract Aug 31 Forward contract receivable12000 Unrealized gain12000 To record the increase in the valu... View the full answer