|Example:||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|
|Required: Prpeare all the necessary journal entries for the purchase of equipment, the forward contract and the settlement on Jan 5.|
|31-Dec||AR||4,000||(104000 – 100,000)||D|
|05-Jan||Investment in FC||108,800||100,000|
|Investment in FC||108,800|
|Q1: How much cash would we have rceeived if we did not enter into the forward contract? $108,800|
|Q2: What is the overall gain or loss in the entire set of transactions? Ans = Gain of 2,400||(102,400 – 100,000)||Net Gain = 8,800 – 6,400 = 2,400|
|Q3: What would have been our gain if we did not enter into the forward contract? Gain = 108,800 – 100,000 = 8,800|
|Q4: in this problem, how much was our loss because of entering into the forward contract? 8,800 – 2,400 = 6,400|
|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|
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