Problem $10-3($LO $3,5)$ Income statement effects of transactions,

$592$

commitments, and hedging.

Clayton Industries sells medical equipment worldwide. On March $1$ of the current year, the company sold equipment, with a cost of $\backslash (\backslash$$ $160,000\backslash ),$ to a foreign customer for $200,000$ euros payable in $60$ days. At the same time, the company purchased a forward contract to sell $200,000$ euros in $60$ days. In another transaction, the company committed, on March $15,$ to deliver equipment in May to a foreign customer in exchange for $300,000$ euros payable in June. This equipment is anticipated to have a completed cost of $\backslash (\backslash$$ $210,000\backslash ).$ On March $15,$ the company hedged the commitment by acquiring a forward contract to sell $300,000$ euros in $90$ days. Changes in the value of the commitment are based on changes in forward rates, and all discounting is based on a $6\backslash \%$ discount rate. Assume all hedges are accounted for as fair value hedges and that the spot$-$forward difference is included in the assessment of hedge effectiveness.

Various spot and forward rates for the euro are as follows:

$\backslash$begin$\{$tabular$\}\{|$llll$|\}$

$\backslash$hline & Spot Rate Forward Rate for $60$ Days from March $1$ & Forward Rate for $90$ Days from March $15\backslash \backslash$

March $1$ Spot Rate$\backslash$$ $1\mathrm{.}180$ Forward Rate for $60$ days from March $1\backslash$$ $1\mathrm{.}181$

March $15$ Spot Rate $1\mathrm{.}181$ Forward Rate for $60$ days from March $1/1\mathrm{.}180$ Forward Rate for $90$ Days from March $15/$ $ $1\mathrm{.}179$

March $31$ Spot Rate $1\mathrm{.}179$ Forward Rate for $60$ days from March $1/1\mathrm{.}178$ Forward Rate for $90$ Days from March $15/1\mathrm{.}177$

April $30$ Spot Rate $1\mathrm{.}175$ Forward Rate for $90$ Days from March $15/1\mathrm{.}174$

Required

For individual months of March and April, calculate the income statement effect of:

$1.$ The foreign currency transaction.

$2.$ The hedge on the foreign currency transaction.

$3.$ The foreign currency commitment.

$4.$ The hedge on the foreign currency commitment.

Please show all work for calculations