On Oct 1, ABC corp sold equipment to John Sales Corp for 80,000 UK Pounds. 

On Oct 1, ABC corp sold equipment to John Sales Corp for 80,000 UK Pounds.
Payment will be made on Jan 5. On Oct 1, ABC Corp also entered into a forward contract to
____________ (buy/sell) 80,000 Pounds at a rate of $1.28 per pound on Jan 5.
Spot rates and forward rates for the relevant dates are given below:
Dates Spot Rates AR Forward Rates FC Payable
01-Oct $1.25 $100,000 $1.28 $102,400
31-Dec $1.30 $104,000 ($4,000) $1.32 $105,600 ($3,200)
05-Jan $1.36 $108,800 ($4,800) $1.36 $108,800 ($3,200) ($6,400)
Required: Prpeare all the necessary journal entries for the purchase of equipment, the forward contract and the settlement on Jan 5.
01-Oct AR 100,000 ($6,400)
    Sales Rev 100,000 105600
01-Oct  Dollars Rec 102,400  (fixed)
       FC Payable 102,400
31-Dec AR 4,000 (104000 – 100,000) D L
     Transaction Gain 4,000 E O
A R
31-Dec Transaction Loss 3,200
         FC Payable $3,200
05-Jan AR $4,800 Dates Spot Rates AR Forward Rates
      Transaction gain 4,800 01-Oct $1.25 $100,000 $1.28
31-Dec $1.30 $104,000 $1.32
05-Jan Transcation Loss 3,200 05-Jan $1.36 $108,800 $1.36
         FC Payable $3,200
                         AR
05-Jan Investment in FC 108,800 100,000
       AR 108,800 4,000
4,800
05-Jan FC Payable 108,800 108,800
      Investment in FC 108,800
05-Jan Cash 102,400 31-Dec 4000 -3,200
      Dollars Rec 102,400 05-Jan 4,800 -3,200
8,800 -6,400
Q1: How much cash would we have rceeived if we did not enter into the forward contract? $108,800
 (102,400 – 100,000) Net Gain   = 8,800 – 6,400   = 2,400
If there was no forward contract and the spot rates were as follows, what is the gain or loss in this situation? Ans: $28,000
Dates Spot Rates AR
01-Oct $1.25 $100,000 On Jan 5, when we receive 80,000 Pounds, how much dollar amount will we receive for the 80,000 Pounds?
31-Dec $1.10 $88,000
05-Jan $0.90 $72,000 Ans: $72,000
Here the direct exchange rate is decreasing.
Because of the fear of decreasing direct exchnage rate, we enter into a forward contract to SELL the FC on Jan 5 at a fixed rate.