Pepper manufacturing engaged in the following transactions:
1. Purchased raw materials from a foreign supplier for 100,000FC when 1FC= $1.10. when the goods were purchased, a 60 day forward contract was also purchased to buy FC at a forward rate of 1FC=$1.11. The supplier was paid 60 days later when 1FC= $1.15.
Required:
A. Prepare the journal entries required on the date of purchase and on the date of payment. If a memo entry is required, indicate so.
B. Indicate the effect on net income without the hedge and the effect on net income with the hedge.
2. Committed to sell inventory (with a cost of $120,000) to a foreign buyer for 200,000 FC when 1FC=$1.13. A forward contract to sell 200,000 FC at $1.15 (90 day forward rate) was purchased on the date of commitment. Sixty days later, when the inventory was shipped, 1FC= $1.17, and 90 days later, when the customer paid, 1FC=$1.18. At the date of shipment, a 30 day forward rate was $1.172. Assume a 6% discount rate.
Required:
C. Prepare the journal entries required on the date of commitment, the date of shipment and the date of payment. if a memo entry is required, indicate so.
D. Indicate the effect on net income without the hedge and the effect on net income with the hedge.
3. Forecasted a need to buy inventory with a cost of 60,000FC in 60 days in order to meet a sale in the amount of $100,000. At the time of the forecast, Pepper purchased a forward contract. When the inventory was actually purchased, it had a cost of 68,000FC. At the time of the forecast. the spot rate was 1FC=$1.16, and a 60 day forward contract to buy FC was 1FC=$1.15. At the time the goods were actually purchased, the spot rate was 1FC=$1.17.
Required:
E. Prepare the journal entries required at the date of forecast, and the date of purchase. if a memo entry is required, indicate so.
F. Indicate the effect on net income without the hedge and the effect on net income with the hedge.