Need a expert to help me to solve journal entries for forward contract as a cash flow hedge respect and forward contract as fair value hedge respect, Thx!

Need a expert to help me to solve journal entries for forward contract as a cash flow hedge respect and forward contract as fair value hedge respect, Thx!

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The Alexander Corporation is a U.S. company and conducts international trade with foreign
companies. It exports goods to foreign customer on December 1, Year 1, with payment of 20,000
crowns to be received on March 1, Year 2. Alexander enters into a forward contract on December
1, Year 1, to sell 20,000 crowns on March 1, Year 2. Relevant exchange rates for the crown on
various dates are as follows:
Value
Date
Spot Rate
Forward Rate (to Match 1,
Y2)
December 1, Year 1
$1.00
$1.04
December 31, Year 1
1.05
1.10
March 1, Year 2
1.12
Alexander’s incremental borrowing rate is 12 percent. The present value factor for two months at
an annual interest rate of 12 percent (1 percent per month) is 0.9803. Alexander’s financial year
ends at December 31.
Question
:
1.
Alexander purchases inventory from a foreign supplier on December 1, Year 1, with
payment of 20,000 crowns to be made on March 1, Year 2. On December 1, Year 1,
Alexander enters into a forward contract to purchase 20,000 crowns on March 1,
Year 2. The inventory purchased on December 1, Year 1, becomes a part of the cost
of goods sold on March 15, Year 2. Assuming that Alexander designates the forward
contract as a cash flow hedge of a foreign currency payable, Prepare journal entries
for these transactions.
2.
Assuming that Alexander designates the forward contract as a fair value hedge of a
foreign currency payable, Prepare journal entries for these transactions.
Solution
:
Date
Spot
Rate
Account
Receivab
le

Accoun
t
Receivab
le
Forward
Rate
Forward
Contract
Fair
Value

Fair
Value
December 1,
Year 1
1
$20,000.0
0
1.04
0.00
December
31, Year 1
1.05
$21,000.0
0
1,000.00
1.1
(1,176.3
6)
(1176.36)
March 1, Year
2
1.12
$22,400.0
0
1,400.00
1.12
(1,600.0
0)
(423.64)

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