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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: U.S. GAAP and IFRS do not require Lynn to record the purchase commitment or the forward foreign exchange contract on the balance sheet as a liability and an asset on June 30, 2017. What is the logic for this accounting?
Question 2: On December 31, 2017, the forward foreign exchange rate for settlement on June 30, 2018, is $1.73 per GBP. Using the financial statement effects template, show the financial statement effects of recording the change in the value of the purchase commitment and the change in the value of the forward contract for 2017. Ignore discounting.
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