On October 1, 2020, Mertag Company (a U.S.-based company) receives an order from a customer in Poland to deliver goods on January 31, 2021, for a price of 1,038,000 Polish zlotys (PLN). Mertag enters into a forward contract on October 1, 2020, to sell PLN 1,038,000 in four months (on January 31, 2021). U.S. dollar–Polish zloty exchange rates are as follows

  
 

Mertag designates the forward contract as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured by referring to changes in the forward rate, and, therefore, forward points are included in assessing hedge effectiveness. Mertag must close its books and prepare financial statements on December 31. Discounting to present value can be ignored.

1. Prepare journal entries for the foreign currency forward contract, foreign currency firm commitment, and export sale.
2. Determine the net benefit, if any, realized by Mertag from entering into the forward contract

A. Prepare journal entries for the foreign currency forward contract, foreign currency firm commitment, and export sale.  

Transcribed Image Text:

Forward Rate Spot Rate $ 0.27 Date (to January 31, 2021) $ 0.31 October 1, 2020 December 31, 2020 0.30 0.34 January 31, 2021 0.32 N/A Forward Rate Spot Rate $ 0.27 Date (to January 31, 2021) $ 0.31 October 1, 2020 December 31, 2020 0.30 0.34 January 31, 2021 0.32 N/A

Answer rating: 100% (QA)

Because the forward exchange rate is used to measure the fair value of the firm commitment forward p... View the full answer