On December 15, 2014, Electronix Company purchased inventory from a foreign supplier for 2,000,000 foreign currency units (fcu's). Payment will be made on February 13, 2015. On December 15, 2014, to hedge the transaction,

Electronix signed a forward contract to buy 2,000,000 fcu's in 60 days. Electronix uses a discount rate of 5% resulting in a 45-day present value factor of .9938. The forward contract will be settled net. The related exchange rates are shown below:

Spot Rate Forward Rate to
2/13/15
December 15, 2014 $0.010 = 1 fcu $0.010 = 1 fcu
December 31, 2014 $0.012 = 1 fcu $0.011 = 1 fcu
February 13, 2015 $0.013 = 1 fcu $0.013 = 1 fcu

On December 15, 2014, Electronix recorded a debit to Inventory and a credit to Accounts Payable (fcu) for $20,000, using the current spot rate.

Required:
1. Show the required entries on December 31, 2014 if the hedge is a cash flow hedge. Round to the nearest whole dollar.
2. Show the required entries on December 31, 2014 if the hedge is a fair value hedge. Round to the nearest whole dollar.
What will be an ideal response?

1. Year-end entries—Cash flow hedge:
Exchange loss 4,000
Accounts payable (fcu) 4,000
(2,000,000 × (.012 - .010))

Forward contract 1,988
Other comprehensive income 1,988

Current forward rate: 2,000,000 fcu × $.011 $ 22,000
Contracted forward rate: 2,000,000 fcu × $.01 20,000
Net change in value 2,000
PV for 45 days @ 5% .9938
Fair value of forward contract on 12/31/14 $ 1,988

Other comprehensive income 4,000
Exchange gain 4,000

2. Year-end entries - Fair value hedge:
Exchange loss 4,000
Accounts payable (fcu) 4,000

Forward contract 1,988
Gain on forward contract 1,988