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On October 1, 2017, Sharp Company (based in Denver, Colorado) entered into a forward contract to sell 210,000 rubles in four months (on January 31, 2018) and receive $105,000 in US dollars. Exhange rates for the ruble follow:
Date Spot Rate Forward Rate
October 1, 2017 $0.46 $0.51
December 31, 2017 0.49 0.52
January 31, 2018 0.51 N/A
Sharp's incremental borrowing rate is 12 percent. The present value factor for one month at an annual interest rate of 12 percent (1 percent per month) is 0.9901. Sharp must close its books and prepare financial statements on December 31.
a. Prepare journal entries, assuming that Sharp entered into forward contact as a fair value hedge of a 210,000 ruble receivable arising from a sale made on October 1, 2017. Include entries for both the sale forward contract.
b. Prepare journal entries, assuming that Sharp entered into the forward contract as a fair hedge of a firm commintment related to a 210,000 ruble sale that will be made on January 31, 2018. Include entries for both the firm commitment and the forward contract. The fair vale of the firm commintment is measured by referring to changes in the forward rate.
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