Crystal Exporting Co. is a U.S. wholesaler engaged in foreign trade


Problem 12-2 Importing/Exporting Transactions with a Forward Contract Hedge

Crystal
Exporting Co. is a U.S. wholesaler engaged in foreign trade. The
following transactions are representative of its business dealings. The
company uses a periodic inventory system and is on a calendar-year
basis. All exchange rates are direct quotations.

Dec. 1 Crystal
Exporting purchased merchandise from Chang’s Ltd., a Hong Kong
manufacturer. The invoice was for 210,000 Hong Kong dollars, payable on
April 1. On this same date, Crystal Exporting acquired a forward
contract to buy 210,000 Hong Kong dollars on April 1 for $.1314.
Dec.
29 Crystal Exporting sold merchandise to Zintel Retailers for 120,000
Hong Kong dollars, receivable in 90 days. No hedging was involved.
April 1 Crystal Exporting received 120,000 Hong Kong dollars from Zintel Retailers.
1
Crystal Exporting submitted full payment of 210,000 Hong Kong dollars
to Chang’s, Ltd., after obtaining the 210,000 Hong Kong dollars on its
forward contract.

Spot rates and the forward rates for the Hong Kong dollar were as follows:
Forward Rate for
Spot Rate April 1 Delivery
Dec. 1 $.1265 $.1314
Dec. 29 .1240 .1305
Dec. 31 .1259 .1308
April 1 .1430

Required:
A. Prepare journal entries for the transactions including the necessary adjustments on December 31.
B. Explain the income statement treatment given to any transaction gains and losses recognized at December 31.

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