How to make journal entries to record forward contract

Assignment Help Financial Accounting

Reference no: EM132719675

Thai sale

On April 30, 20X6 (20X6 fiscal year), Mack reached an agreement to sell equipment to a customer in Thailand and agreed to take payment in Thai baht (?). The equipment was scheduled to be delivered on June 12, 20X6 (20X7 fiscal year), at which time the customer would pay in full. Given Mack's uncertainty about dealing in this unfamiliar currency, on the date the sale was negotiated, the company also arranged with its bank to hedge the transaction. This was the first time that Mack has entered into a formal hedging arrangement for one of its foreign-currency transactions.

The sale price of the equipment was ?2,500,000 and the cost to manufacture the equipment was C$65,000. Selected information regarding the spot rates and forward rates between the Thai baht and the Canadian dollar was as follows:

Date
April 30, 20X6
Spot rate

?1 = C$0.03200
Forward rate for delivery June 12, 20X6
?1 = C$0.03336

Date
May 31, 20X6
Spot rate

?1 = C$0.03334
Forward rate for delivery June 12, 20X6
?1 = C$0.03385

Date
June 12, 20X6
Spot rate

?1 = C$0.03475
Forward rate for delivery June 12, 20X6
?1 = C$0.03475

The goods were delivered on June 12, 20X6, as per the sales agreement, and the customer paid on the same day. The forward contract was settled on June 12, 20X6, as well. Hedge accounting was not used.

Required:

Problem 1: Prepare journal entries to record the forward contract and the sale of equipment, including the adjusting entries required at year end and the settlement date. Support the journal entries with a brief explanation as to their nature. Include supporting calculations in the journal entries or reference their location elsewhere on the worksheet.

Reference no: EM132719675

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