On March 1, 2020, Norton Company committed to purchase inventory from a foreign vendor with a delivery date of May 1, 2020. Payment of 300,000 FC is also due on May 1. In order to limit its exposure on this transaction, the company hedged the commitment by acquiring a forward contract on March 1 to buy 300,000 FC for delivery on May 1. The inventory will be sold in May to a customer in the U.S. for $425,000. The spot rates and the forward rates for a contract to buy FC on May 1 during this period appear below:

Spot rate Forward Rate

March 1 $1.173 $1.175

March 31 1.176 1.178

May 1 1.180 1.180

Changes in the value of the commitment are based on changes in the forward rates. A 6% discount rate is to be used for all necessary discounting.

1. Prepare all necessary journal entries through May 1, assuming the company prepares a set of quarterly statements on March 31. Indicate what would be shown on the income statement for the first quarter and the balance sheet for March 31.
2. Prepare the entry to record the sale of the inventory on May 12. Determine the gross profit with, and without, the hedge.

Answer rating: 100% (QA)

Norton Company Journal Entries March 1 Norton Company purchases inventory from a foreign vendor with ... View the full answer