Merele Corp., based in the US, sold inventory for 500,000 Euro to Hacker Co. on December 2, 2008. The customer will pay March 1, 2009, payable in Euro. On 12/2/2008, Merele entered into a 90-day forward contract to hedge the receivable from Hacker. The following exchange rates apply: Spot Rate 12/2/08 $1.70, 12/31/08 $1.705, 3/1/09 $1.7. Forward Rate for 3/1/09 at 12/2/08: 1.68, at 12/31/08: $1.69.
a) Assume the Forward was designated as a cash flow hedge and Merele’s incremental borrowing rate is 6% giving a 60-day present value factor of .9901. Give all entries related to these transactions and date the entries.
b) Assume the Forward was designated as a fair value hedge. Give all entries for these transactions and date the entries.