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Hedging a Forecasted Sale Transaction On December 10, 2017, Daisy Foods, a U.S. company, anticipates sales in the amount of A$45,000,000 to an Australian customer, payment in Australian dollars to be received at the end of May 2018. On December 10, 2017, Daisy Foods enters a forward contract for the sale of A$45,000,000 for a total price of $39,793,500 on May 31, 2018. The forward contract qualifies as a hedge of the forecasted sale. On March 1, 2018, Daisy delivered the merchandise to the Australian customer. On May 31, 2018, Daisy received A$45,000,000 from the customer, and delivered it to the broker to close the forward contract. Daisy Foods' accounting year ends January 31. Relevant exchange rates ($/A$) are as follows; Spot rate $0.8845 Forward rate for delivery May 31, 2018 $0.8843 December 10, 2017 January 31, 2018 0.8836 0.8834 March 1, 2018 0.8802 0.8800 0.8754 May 31, 2018 Prepare the journal entries to record the above events, including January 31, 2018 adjusting entries. General Journal Date Description Debit Credit 01/31/18 Investment in forward contract ✓ Other comprehensive income ✓ 40,500 0✓ 0✓ 40,500 To record increase in value of forward contract. 03/01/18 Investment in forward contract Other comprehensive income 153,000 153,000 Accounts receivable Sales revenue To record increase in value of forward contract. ✔39,609,000 ✔ 0✓ 039,609,000 ✔ 193,500✔ 0✓ 193,500 To record delivery of merchandise. Other comprehensive income Sales revenue To reclassify accumulated other comprehensive income. 05/31/18 Exchange loss Accounts receivable To adjust accounts receivable. Investment in forward contract Exchange gain To record increase in value of forward contract. Foreign currency Accounts receivable To record payment from the customer. Cash Investment in forward contract Foreign currency To record settlement of the forward contract. 216,000✔ 0✓ 0✓ 216,000 0% ✓ 0x 39,393,000 39,393,000 ✔45,000,000 x 0✓ 0✓ 5,607,000 x ✓ 039,393,000

Hedging a Forecasted Sale Transaction On December 10, 2017, Daisy Foods, a U.S. company, anticipates sales in the amount of A$45,000,000 to an Australian customer, payment in Australian dollars to be received at the end of May 2018. On December 10, 2017, Daisy Foods enters a forward contract for the sale of A$45,000,000 for a total price of $39,793,500 on May 31, 2018. The forward contract qualifies as a hedge of the forecasted sale. On March 1, 2018, Daisy delivered the merchandise to the Australian customer. On May 31, 2018, Daisy received A$45,000,000 from the customer, and delivered it to the broker to close the forward contract. Daisy Foods' accounting year ends January 31. Relevant exchange rates ($/A$) are as follows; Spot rate $0.8845 Forward rate for delivery May 31, 2018 $0.8843 December 10, 2017 January 31, 2018 0.8836 0.8834 March 1, 2018 0.8802 0.8800 0.8754 May 31, 2018 Prepare the journal entries to record the above events, including January 31, 2018 adjusting entries. General Journal Date Description Debit Credit 01/31/18 Investment in forward contract ✓ Other comprehensive income ✓ 40,500 0✓ 0✓ 40,500 To record increase in value of forward contract. 03/01/18 Investment in forward contract Other comprehensive income 153,000 153,000 Accounts receivable Sales revenue To record increase in value of forward contract. ✔39,609,000 ✔ 0✓ 039,609,000 ✔ 193,500✔ 0✓ 193,500 To record delivery of merchandise. Other comprehensive income Sales revenue To reclassify accumulated other comprehensive income. 05/31/18 Exchange loss Accounts receivable To adjust accounts receivable. Investment in forward contract Exchange gain To record increase in value of forward contract. Foreign currency Accounts receivable To record payment from the customer. Cash Investment in forward contract Foreign currency To record settlement of the forward contract. 216,000✔ 0✓ 0✓ 216,000 0% ✓ 0x 39,393,000 39,393,000 ✔45,000,000 x 0✓ 0✓ 5,607,000 x ✓ 039,393,000

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Hedging a Forecasted Sale Transaction On December 10, 2017, Daisy Foods, a U.S. company, anticipates sales in the amount of A$45,000,000 to an Australian customer, payment in Australian dollars to be received at the end of May 2018. On December 10, 2017, Daisy Foods enters a forward contract for the sale of A$45,000,000 for a total price of $39,793,500 on May 31, 2018. The forward contract qualifies as a hedge of the forecasted sale. On March 1, 2018, Daisy delivered the merchandise to the Australian customer. On May 31, 2018, Daisy received A$45,000,000 from the customer, and delivered it to the broker to close the forward contract. Daisy Foods' accounting year ends January 31. Relevant exchange rates ($/A$) are as follows; Spot rate $0.8845 Forward rate for delivery May 31, 2018 $0.8843 December 10, 2017 January 31, 2018 0.8836 0.8834 March 1, 2018 0.8802 0.8800 0.8754 May 31, 2018 Prepare the journal entries to record the above events, including January 31, 2018 adjusting entries. General Journal Date Description Debit Credit 01/31/18 Investment in forward contract ✓ Other comprehensive income ✓ 40,500 0✓ 0✓ 40,500 To record increase in value of forward contract. 03/01/18 Investment in forward contract Other comprehensive income 153,000 153,000 Accounts receivable Sales revenue To record increase in value of forward contract. ✔39,609,000 ✔ 0✓ 039,609,000 ✔ 193,500✔ 0✓ 193,500 To record delivery of merchandise. Other comprehensive income Sales revenue To reclassify accumulated other comprehensive income. 05/31/18 Exchange loss Accounts receivable To adjust accounts receivable. Investment in forward contract Exchange gain To record increase in value of forward contract. Foreign currency Accounts receivable To record payment from the customer. Cash Investment in forward contract Foreign currency To record settlement of the forward contract. 216,000✔ 0✓ 0✓ 216,000 0% ✓ 0x 39,393,000 39,393,000 ✔45,000,000 x 0✓ 0✓ 5,607,000 x ✓ 039,393,000
Transcribed Image Text:Hedging a Forecasted Sale Transaction On December 10, 2017, Daisy Foods, a U.S. company, anticipates sales in the amount of A$45,000,000 to an Australian customer, payment in Australian dollars to be received at the end of May 2018. On December 10, 2017, Daisy Foods enters a forward contract for the sale of A$45,000,000 for a total price of $39,793,500 on May 31, 2018. The forward contract qualifies as a hedge of the forecasted sale. On March 1, 2018, Daisy delivered the merchandise to the Australian customer. On May 31, 2018, Daisy received A$45,000,000 from the customer, and delivered it to the broker to close the forward contract. Daisy Foods' accounting year ends January 31. Relevant exchange rates ($/A$) are as follows; Spot rate $0.8845 Forward rate for delivery May 31, 2018 $0.8843 December 10, 2017 January 31, 2018 0.8836 0.8834 March 1, 2018 0.8802 0.8800 0.8754 May 31, 2018 Prepare the journal entries to record the above events, including January 31, 2018 adjusting entries. General Journal Date Description Debit Credit 01/31/18 Investment in forward contract ✓ Other comprehensive income ✓ 40,500 0✓ 0✓ 40,500 To record increase in value of forward contract. 03/01/18 Investment in forward contract Other comprehensive income 153,000 153,000 Accounts receivable Sales revenue To record increase in value of forward contract. ✔39,609,000 ✔ 0✓ 039,609,000 ✔ 193,500✔ 0✓ 193,500 To record delivery of merchandise. Other comprehensive income Sales revenue To reclassify accumulated other comprehensive income. 05/31/18 Exchange loss Accounts receivable To adjust accounts receivable. Investment in forward contract Exchange gain To record increase in value of forward contract. Foreign currency Accounts receivable To record payment from the customer. Cash Investment in forward contract Foreign currency To record settlement of the forward contract. 216,000✔ 0✓ 0✓ 216,000 0% ✓ 0x 39,393,000 39,393,000 ✔45,000,000 x 0✓ 0✓ 5,607,000 x ✓ 039,393,000
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