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Question - On October 15, our company has executed a purchase order for new equipment to be purchased from a supplier in Denmark for a purchase price of DKK 1.2 million. The equipment is deliverable on March 31. In order to hedge the commitment to pay DKK1.2 million, we enter into a forward exchange contract on October 15 to receive DKK1.8 million on March 31 at an exchange rate of $0.17: DKK1. Assume the following exchange gates:
Date
Spot Rates
Forward Rates
October 15
$0.15:DKK1
$0.17:DKK1
December 31
$0.16:DKK1
$0.18:DKK1
March 31
$0.20:DKK1
n/a
Required - Prepare the journal entries to record the following:
Execution of the purchase order and forward contract
Adjusting entries at December 31
Receipt of equipment and payment to equipment supplier on March 31.
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