Reference no: EM132934107
Question - On June 1, Year 3, Morgan Enterprises contracted to purchase merchandise from a Vendor in Europe at a purchase price of Euro 600,000. The contract called for the merchandise to be delivered to Morgan on September 30, Year 3 with payment due on delivery. On June 1, Year 3, Morgan arranged a forward contract to purchase Euro 600,000 on September 30, Year 3, at a rate of Euro 1 = $1.52. Milton's year end is August 31.
The merchandise was delivered on September 30, Year 3 and Euro 600,000 were purchased from the bank and delivered to the Vendor.
Exchange rates were as follows:
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Spot Rates
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Forward Rates
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June 1, Year 3
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Euro 1 = $1.43
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Euro 1 = $1.52
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August 31, Year 3
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Euro 1 = $1.50
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Euro 1 = $1.54
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September 30, Year 3
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Euro 1 = $1.51
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Euro 1 = $1.51
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Required -
a. Prepare the journal entries that Morgan 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 a August 31, Year 3. And indicate how each would appear on the company's financial statements.
c. Prepare the journal entries that Morgan 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 August 31, Year 3 and indicate how each would appear on the company's financial statements.
e. Describe how accounting for the hedge affects the current ratio and indicate which accounting treatment for the hedge would show the strongest liquidity position.
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