Reference no: EM131705427

Question: On October 1, Year 1, Butterworth Company entered into a forward contract to sell 100,000 rupees in four months (on January 31, Year 2). Relevant exchange rates for the rupee are as follows:

                                                                                               Forward Rate
Date                                                                Spot Rate                     (to January 31, Year 2)

October 1, Year 1                                     80.069                         50 .065

December 31, Year 1                                 0.071                             0.074

January 31, Year 2  ................................. 0.072

Butterworth Company'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. Butterworth must close its books and prepare financial statements on December 31.

Required: a. Prepare journal entries assuming the forward contract was entered into as a fair value hedge of a 100,000-rupee receivable arising from a sale made on October 1, Year 1. Include entries for both the sale and the forward contract.

b. Prepare journal entries assuming the forward contract was entered into as a fair value hedge of a firm commitment related to a 100,000-rupee sale that will be made on January 31, Year 2. Include entries for both the firm commitment and the forward contract. The fair value of the firm commitment is measured through reference to changes in the forward rate.