Solved: On August 1 Ling Harvey Corporation a U S based

importer placed an

On August 1, Ling-Harvey Corporation (a U.S.-based importer) placed an order to purchase

merchandise from a foreign supplier at a price of 400,000 ringgits. Ling-Harvey will receive and
make payment for the merchandise in three months on October 31. On August 1, Ling-Harvey
entered into a forward contract to purchase 400,000 ringgits in three months at a forward rate of
$0.60. It properly designates the forward contract as a fair value hedge of a foreign currency
firm commitment.

The fair value of the firm commitment is measured by referring to changes in the forward rate.
Relevant exchange rates for the ringgit are as follows:

_______________________________________ Forward Rate

Date _________________ Spot Rate ________ (to October 31)

August 1 .................... $0.60 .............. $0.60

September 30 ............... 0.63 .............. 0.66

October 31 .................. 0.68 .............. N/A

Ling-Harvey's incremental borrowing rate is 12 percent. The present value factor for one month
at an annual interest rate of 12 percent (1 percent per month) is 0.9901. Ling-Harvey must close
its books and prepare its third-quarter financial statements on September 30.

a. Prepare journal entries for the forward contract and firm commitment through October 31.

b. Assuming the inventory is sold in the fourth quarter, what is the impact on net income over
the two accounting periods?

c. What net cash outflow results from the purchase of merchandise from the foreign supplier?

On August 1 Ling Harvey Corporation a U S based importer placed an

ANSWER
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