Reference no: EM131877806
Question - On June 1, Castejon Corp. purchased merchandise from a Brazilian supplier at a price of 1,200,000 reals. The invoice is due on September 1. O June 1, Castejon signed a forward contract to purchase 1,200,000 reals on September 1. Information you may find useful is below:
Date Spot Rate Forward rate
June 1 $0.085 $0.089
June 30 0.088 0.092
Sept 1 0.082 n/a
Castejon's incremental borrowing rate is 12% per annum. Castejon needs to prepare quarterly financial statements at June 30.
1. If Castejon designates this forward contract as a cash flow hedge, identify what necessary steps it must take at June 1.
2. Prepare journal entries for Castejon on each date listed above. If none is needed, state so.
3. Show the impact on net income for the quarter ended June 30 and the quarter ended September 30. Also, show the impact the impact on income for both quarters combined.
4. If this had been designated as a fair value hedge, prepare the journal entries needed for each date. If none is needed, state so.
5. Show the impact on net income for the quarter ended June 30 and the quarter ended September 30. Also, show the impact the impact on income for both quarters combined.
6. Compare and contrast the impact on income from designating the forward contract as a cash flow hedge versus a fair value hedge. Why would any company choose one designation over another for a forward contract for a recognized foreign currency asset or liability?