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How would the effects in requirements b-e differ

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Lynn Construction enters into a firm purchase commitment for equipment to be delivered on June 30, 2017, for a price of 10,000 GBP. It simultaneously signs a forward foreign exchange contract for 10,000 GBP. The forward rate on June 30, 2017, for settlement on June 30, 2018, is $1.64 per GBP. Lynn designates the forward foreign exchange contract as a fair value hedge of the firm commitment.

REQUIRED

Question 1: Show the financial statement effects on June 30, 2018, to settle the forward foreign exchange contract.

Question 2: How would the effects in Requirements b-e differ if Lynn had chosen to designate the forward foreign exchange contract as a cash flow hedge instead of a fair value hedge?

Question 3: Suggest a scenario that would justify Lynn treating the forward foreign exchange contract as a fair value hedge and a scenario that would justify the firm treating the contract as a cash flow hedge.

Reference no: EM132933810

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