Case: Zorba Company
Zorba Company, a U.S.-based importer of specialty olive oil, placed an order with a foreign supplier for 500 cases of olive oil at a price of 100 crowns per case. The total purchase price is 50,000 crowns. Relevant exchange rates are as follows:
Zorba Company has an incremental borrowing rate of 12 percent (1 percent per month) and closes the books and prepares financial statements on December 31.
Required
1. Assume the olive oil was received on December 1, Year 1, and payment was made on January 31, Year 2. There was no attempt to hedge the exposure to foreign exchange risk. Prepare journal entries to account for this import purchase.
2. Assume the olive oil was received on December 1, Year 1, and payment was made on January 31, Year 2. On December 1, Zorba Company entered into a two-month forward contract to purchase 50,000 crowns. The forward contract is properly designated as a fair value hedge of a foreign currency payable. Prepare journal entries to account for the import purchase and foreign currency forward contract.