Starflyer Inc., a Canadian public company, entered into the following transactions late in 20X6:Transaction #1: On October 15, Starflyer Inc. purchased inventory from a Mexican supplier for800,000 pesos (Ps). On the same day, Starflyer Inc. entered into a forward contract for Ps 800,000at the 60-day forward rate. The Mexican supplier was paid in full on December 15, 20X6.Transaction #2: On October 15, 20X6, Starflyer Inc. sold merchandise to a company in Sweden for6,000,000 kronor. The amount was to be paid in 90 days. Starflyer Inc. hedged the receivable forthe 90-day period with a forward contract.Starflyer Inc. has a year-end of December 31. Exchange rates were as follows during this period of time:October 15, 20X61 Kronor =1 Kronor = $0.10781 Kronor = $0.10801 Kronor = $0.1094I Kronor = $0.1099I Kronor = $0.1075I Kronor = $0.1058Ps1 = $0.3960$0.1250October 15, 20X6, forward 60-day rateOctober 15, 20X6, forward 90-day ratePs1 = $0.3990Ps1 = $0.3970December 15, 20X6Ps1 = $0.3880December 31, 20X6= $0.3810December 31, 20X6, forward rate to January 15, 20X7Ps1 = $0.3920January 15, 20X7Ps1 = $0.3920The company uses the net method to record hedging transactions.Required:Prepare the journal entries that Starflyer Inc. should make to record the events described above.

Forward Contract: These contracts are created between two parties for buying and selling an asset at…

Starflyer Inc., a Canadian public company, entered into the following transactions late in 20X6: Transaction #1: On October 15, Starflyer Inc. purchased inventory from a Mexican supplier for 800,000 pesos (Ps). On the same day, Starflyer Inc. entered into a forward contract for Ps 800,000 at the 60-day forward rate. The Mexican supplier was paid in full on December 15, 20X6. Transaction #2: On October 15, 20X6, Starflyer Inc. sold merchandise to a company in Sweden for 6,000,000 kronor. The amount was to be paid in 90 days. Starflyer Inc. hedged the receivable for the 90-day period with a forward contract.

Starflyer Inc., a Canadian public company, entered into the following transactions late in 20X6: Transaction #1: On October 15, Starflyer Inc. purchased inventory from a Mexican supplier for 800,000 pesos (Ps). On the same day, Starflyer Inc. entered into a forward contract for Ps 800,000 at the 60-day forward rate. The Mexican supplier was paid in full on December 15, 20X6. Transaction #2: On October 15, 20X6, Starflyer Inc. sold merchandise to a company in Sweden for 6,000,000 kronor. The amount was to be paid in 90 days. Starflyer Inc. hedged the receivable for the 90-day period with a forward contract.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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On August 1, Ling-Harvey Corporation (a U.S.-based importer) placed an order to purchase merchandise from a foreign supplier at a price of 400,000 ringgits. Ling-Harvey will receive and make payment for the merchandise in three months on October 31. On August 1, Ling-Harvey entered into a forward contract to purchase 400,000 ringgits in three months at a forward rate of $0.60. It properly designates the forward contract as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured by referring to changes in the forward rate. Relevant exchange rates for the ringgit are as follows: Date Spot rate Forward rate ( to October 31) August 1 $0.60 $0.60 September30 0.63 0.66 October 31 0.68 N/A Ling-Harvey’s incremental borrowing rate is 12 percent. The present value factor for one month at an annual interest rate of 12 percent (1 percent per month) is 0.9901. Ling-Harvey must close its books and prepare its third-quarter financial…
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