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Show the effectiveness of the hedge

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Question - ParentCo is a calendar year domestic corporation that ordered Product X from ExternalCo (foreign corporation) on November 1, 2013.  The cost of Product X is 1,000,000FC (the foreign currency denomination).  They enter into an agreement for the delivery of Product X by January 31, 2014. ParentCo entered into a forward exchange contract to acquire 1,000,000FC at a forward rate of $1.23/FC on January 31, 2014. Currently, the exchange rate between U.S. and the foreign country is $1.20/FC.

November 1, 2013 December 31, 2013 January 31, 2014 Spot Rate $1.20 $1.25 $1.30 Forward Rate $1.23 $1.26 $1.30

Using the applicable rates from above, explain the type of hedge that is being used and show the journal entries for all related transactions on 11/1/2013, 12/31/2013 and the 1/31/2014. In addition, show the effectiveness of the hedge. Explain how the journal entries affect the balance sheet and income statement of ParentCo (use examples to support your responses). Describe the effectiveness of the hedge. Show and explain all calculations.

Note: ParentCo prepares year-end financial statements on 12/31/2013.

Reference no: EM131747787

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