On November 1, 2016, a U.S. company purchased inventory from a foreign supplier for 100,000 FC, with payment to be made on January 31, 2017, in FC

To hedge against fluctuations in exchange rates, the firm entered into a forward exchange contract on November 1 to purchase 100,000 FC on January 31, 2017 . The U.S. firm has a December 31 year end for accounting purposes. The following exchange rates may apply: Date Spot Rate Fwd. Rate 11/1/16 $0.15 $0.13 12/31/16 $0.16 $0.14 1/31/17 $0.165 $0.165 Discount rate = 12% Required: Make all the necessary journal entries for the U.S. firm relative to these events occurring between November 1, 2016, and January 31, 2017 .

Nov. 1

Inventory 15,000

Accounts Payable
15,000

Memo: Company acquired a forward contract to buy

100,000 FC at a forward rate of $0.13

Dec. 31

Exchange Loss [100,000 x (.16 - .15)] 1,000

Accounts Payable
1,000

Forward Contract 990

Gain on Contract
990

Jan. 31

Forward Contract 2,510

Gain on Contract
2,510

Foreign Currency (100,000 x .165) 16,500

Forward Contract
3,500
Cash (100,000 x .13)
13,000

Accounts Payable (15,000 + 1,000) 16,000

Exchange Loss 500

Foreign Currency
16,500

11/1 12/31 1/31
# of FC 100,000 100,000 100,000
Spot Rate .15 .16 .165
Forward Rate-Remaining Time .13 .14 .165
Initial Forward Rate
.13 .13

Fair Value of Fwd. Contract:

Original
13,000 13,000
Current
14,000 16,500
Change-Gain (loss) in Fwd. Value
1,000 3,500

Present Value of Change:

n = 1, i = .12/12 (1,000 / 1.01)
990

n = 2, i = .12/12

3,500
Change in Value:

Current Present Value
990 3,500
Prior Present Value
0 990
Change in Present Value
990 2,510