Answer:
Detailed workings are in the explanations.
Explanation:
August 1
On August 1, Ling Harvey entered into a forward contract to purchase 400000 ringgits in 3 months at a forward rate of $0.60.
If Ling Harvey has to pay 400000 ringgits now, total outflow would be $ 240000 (400000*0.60) and in forward contract it has to pay $ 240000 also (400000*0.60), so ling harvey has not incurred any loss
So, there is a firm commitment to pay $ 240000 on October, 31
For entering into a forward contract, there will be no entry.
On September, 30
Forward contract rate has increased to 0.66 from 0.60 (august, 1), so there is a increase in the fair value of the Forward Contract. Earlier its value was $240,000 on Aug,1 but now its value is $ 264,000, so there is a increase in fair value by $24,000
Since this $24000 will be realized on Oct, 31, we will book it today at present value
Present value = $24000*0.9901= $23,762.4
Journal entry would be as follows:
Debit: Forward Contract a/c $23,762.4
Credit: Gain on Forward Contract $23,762.4
Now, the spot rate determines the fair value of Commitment, so there is an increase in fair value of firm commitment by (0.63 - 0.60) * $400,000 =$12,000.
0.63 is the spot rate on September, 30
Since our Firm commitment value increased by $12,000, we need to book it at present value
.
Present Value = $12,000*0.9901=$11,881.2
Journal Entry is as follows:
Debit: Loss on Firm Commitment a/c $11,881.2
Credit: Firm Commitment $11,881.2
So its effect on Net income is as follows:
Debit: Gain on Forward Contract a/c $23,762.4
Credit: Loss on Firm Commitment $11,881.2
Credit: Retained Earnings $11,881.2
On October 31
Today spot rate is 0.68, so the value of the forward contract when compared to its value on Aug 1
= (0.68 - 0.60) *$400,000
= $32,000
So there is an increase in Forward Contract Value by $32,000, since we have already booked $23,762.4, we will book the additional value $82,37.6 as follows:
Debit: Forward Contract a/c $8,237.6
Credit: Gain on Forward Contact $8,237.6
So, the Firm Commitment value has also increased from 0.60(Aug 1) to 0.68
Increase in value = (0.68-0.60) *$400,000 = $32,000
As we have already booked a liability of $11,881.2, we will be book the additional increase in value of $20,118.8 as follows
Debit: Loss on Firm Commitment a/c $20,118.8
Credit: Firm Commitment $20,118.8
So, its effect on Net Income is as follows
Debit: Gain on Forward Contract a/c $8,237.6
Debit: Retained Earnings a/c $11,881.2
Credit: Loss on Firm Commitment $20,118.8
So the total effect on Net income is 0, as on Sept 30 retained earnings has been credited by $11881.2 and on Oct 31, it has been debited by $11881.2... This is due to as there was no difference between spot rate & forward rate on August 1
As on 31st October, there is a debit balance of $32,000 in Forward Contract & credit balance of $32000 in Firm commitment.
Entry for Goods received & payment to foreign supplier is as follows
Debit: Inventory (At spot rate on Aug 1) $240,000
Debit: Firm Commitment (offset) $32,000
Credit: Forward contract (offset) $32,000
Credit: Cash (At forward rate on Aug 1) $240,000
The net cash outflow to foreign supplier is $240,000.
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