The fair value of the firm commitment is measured by referring to changes in the forward rate. Relevant exchange rates for the ringgit are as follows:
_______________________________________ Forward Rate
Date _________________ Spot Rate ________ (to October 31)
August 1 ………………..
September 30 ……………
October 31 ………………
Ling-Harvey’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. Ling-Harvey must close its books and prepare its third-quarter financial statements on September 30.
a. Prepare journal entries for the forward contract and firm commitment through October 31.
b. Assuming the inventory is sold in the fourth quarter, what is the impact on net income over the two accounting periods?
c. What net cash outflow results from the purchase of merchandise from the foreign supplier?
On August 1 Ling Harvey Corporation a U S based importer placed an
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