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On October 1 Year 6 Versatile Company contracted to sell merchandise to a customer in Switzerland at a selling price of SF400000 The contract called for the merchandise to be delivered to the

On October 1, Year 6, Versatile Company contracted to sell merchandise to a customer in Switzerland at a selling price of SF400,000. The contract called for the

merchandise to be delivered to the customer on January 31, Year 7, with payment due on delivery. On October 1, Year 6, Versatile arranged a forward contract to deliver SF400,000 on January 31, Year 7, at a rate of SF1 5 $1.20. Versa tile’s year- end is December 31.

The merchandise was delivered on January 31, Year 7, and SF400,000 were received and delivered to the bank.

Exchange rates were as follows:

 

 

Spot rates

Forward rates

October 1, Year 6

SF1 5 $1.18

SF1 5 $1.20

December 31, Year 6

SF1 5 $1.21

 

SF1 5 $1.22

 

January 31, Year 7

SF1 5 $1.19

SF1 5 $1.19

Required:

(a) Prepare the journal entries that Versatile should make to record the events described assuming that the forward contract is designated as a cash flow hedge.

(b) Prepare a partial trial balance of the accounts used as at December 31, Year 6, and indicate how each would appear on the company’s financial statements.

(c) Prepare the journal entries that Versatile should make to record the events described, assuming that the forward contract is designated as a fair value hedge.

(d) Prepare a partial trial balance of the accounts used as at December 31, Year 6, and indicate how each would appear on the company’s financial statements.

(e) Describe how the accounting for the hedge affects the current ratio, and indicate which accounting treatment for the hedge would show the strongest liquidity position.

Aug 13 2020 View more View Less

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