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

 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 01-Oct \$1.25 \$100,000 \$1.28 \$102,400 31-Dec \$1.30 \$104,000 (\$4,000) \$1.32 \$105,600 05-Jan \$1.36 \$108,800 (\$4,800) \$1.36 \$108,800 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 Sales Rev 100,000 01-Oct Dollars Rec 102,400 (fixed) FC Payable 102,400 31-Dec AR 4,000 (104000 – 100,000) D Transaction Gain 4,000 E A 31-Dec Transaction Loss 3,200 FC Payable \$3,200 05-Jan AR \$4,800 Dates Spot Rates AR Transaction gain 4,800 01-Oct \$1.25 \$100,000 31-Dec \$1.30 \$104,000 05-Jan Transcation Loss 3,200 05-Jan \$1.36 \$108,800 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 Dollars Rec 102,400 05-Jan 4,800 8,800 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