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. | |||||||||
