On October 1, 2020, Mertag Company (a U.S.-based company) receives an order from a customer in Poland to deliver goods on January 31, 2021, for a price of 1,036,000 Polish zlotys (PLN). Mertag enters into a forward contract on October 1, 2020, to sell PLN 1,036,000 in four months (on January 31, 2021). U.S. dollar -Polish zloty exchange rates are as follows: Date Spot Rate Forward Rate October 1, 2020 .25 .29 December 31, 2020 .28 .32 January 31, 2021 .30 N/A Mertag designates the forward contract as a fair value hedge of a foreign firm commitment. The fair value of the firm commitment is measured by referring to changes in the forward rate, and, therfore, forward points are included in assessing hedge effectiveness. Mertag must close its books and prepare financial statements on December 31. Discounting to present value can be ignored. A. Prepare journal entries for the foreign currency forward contract, foreign currency firm commitment, and export sale. B. Determine the net benefit, if any, realized by Mertag from entering into the forward contract.

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

ChapterA1: International Financial Reporting Standards

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On October 1, 2020, Mertag Company (a U.S.-based company) receives an order from a customer in Poland to deliver goods on January 31, 2021, for a price of 1,036,000 Polish zlotys (PLN). Mertag enters into a forward contract on October 1, 2020, to sell PLN 1,036,000 in four months (on January 31, 2021). U.S. dollar -Polish zloty exchange rates are as follows:

Date Spot Rate Forward Rate

October 1, 2020 .25 .29

December 31, 2020 .28 .32

January 31, 2021 .30 N/A

Mertag designates the forward contract as a fair value hedge of a foreign firm commitment. The fair value of the firm commitment is measured by referring to changes in the forward rate, and, therfore, forward points are included in assessing hedge effectiveness. Mertag must close its books and prepare financial statements on December 31. Discounting to present value can be ignored.

A. Prepare journal entries for the foreign currency forward contract, foreign currency firm commitment, and export sale.

B. Determine the net benefit, if any, realized by Mertag from entering into the forward contract.

Determine the net benefit, if any, realized by Mertag from entering into the forward contract. (Do not round intermediate
calculations. Negative amount should be entered with a minus sign.)
Net benefit
$ 310,800 8

No
Date
General Journal
Debit
Credit
10/01/2020
No journal entry required
10/01/2020
No journal entry required
12/31/2020
Forward contract
31,080
Foreign exchange gain or loss
31,080
12/31/2020
Foreign exchange gain or loss
31,080
Firm commitment
31,080
01/31/2021
Forward contract
20,720
Foreign exchange gain or loss
20,720
6.
01/31/2021
Foreign exchange gain or loss
20,720
Firm commitment
20,720
7
01/31/2021
Foreign currency (PLN)
310,800
Cash
259,000 8
Forward contract
51,800
8
01/31/2021
Inventory
310,800 8
Foreign currency (PLN)
310,800
01/31/2021
Firm commitment
51,800
Foreign exchange gain or loss
51,800
2.
3.

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