Reference no: EM132824095
Question - Bulihan Weaves requires 500,000 pounds of straws for its manufacturing operations on February 1, 2018. To eliminate possible fluctuation of the volatile price of straws, and to protect itself from the variability of the market price, Bulihan negotiated a forward contract with a reputable banking institution on August 1, 2017 for the entity to buy 500,000 pounds of straws on February 1, 2018 at a price of P18,875,000. The forward contract is designated as a cash flow hedge.
The terms agreed upon by the parties include the following:
The difference is paid by the bank to the entity if the market price on February 1, 2018 is more than the required price. On the contrary, Bulihan shall pay the bank when the market price is below than the price Bulihan wants.
The market price of straws per pound is P35.25 on December 31, 2017 and P40.25 on February 1, 2018.
REQUIRED -
1. Prepare the journal entries required for 2017 and 2018.
2. What is the net effect of unrealized gain in a forward contract?
3. When does an entity recognize interest rate swap payable?
4. Why the interest rate swap receivable received is higher than the previous amount recorded?
5. Explain the statement "pay fixed interest rate swap, receive variable".
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