On October 1, 2013, Jarvis Co The Company's Borrowing Rate Is 12

question 41

Essay

On October 1, 2013, Jarvis Co. sold inventory to a customer in a foreign country, denominated in 100,000 local currency units (LCU). Collection is expected in four months. On October 1, 2013, a forward exchange contract was acquired whereby Jarvis Co. was to pay 100,000 LCU in four months (on February 1, 2014) and receive $78,000 in U.S. dollars. The spot and forward rates for the LCU were as follows: $\begin{array}{|l|l|l|}\hline{\text { Date }} &{\text { Rate Description }} &{\text { Exchange Rate }} \\\hline \text { October } 1,2013 & \text { Spot Rate } & \$ .83=1 \mathrm{LCU} \\\hline \text { December 31,2013 } & \text { Spot Rate } & \$ .85=1 \mathrm{LCU} \\\hline & \text { 1-Month Forward Rate } & \$ .80=1 \mathrm{LCU} \\\hline \text { February 1,2014 } & \text { Spot Rate } & \$ .86=1 \mathrm{LCU} \\\hline\end{array}$ The company's borrowing rate is 12%. The present value factor for one month is .9901.
Any discount or premium on the contract is amortized using the straight-line method.
Assuming this is a cash flow hedge; prepare journal entries for this sales transaction and forward contract.

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Definitions:

Sales Revenue Approach

A method to recognize revenue based on the sales of goods or services, highlighting the importance of sales activities in generating income for the business.

Unadjusted Year End

The financial figures reported at the end of a fiscal year before any adjustments are made for accruals, deferrals, or other accounting entries.

Trial Balance

An accounting report that lists the balances of all ledgers accounts in order to verify that total debits equal total credits.

Factoring Arrangement Without Recourse

A financial transaction in which a business sells its receivables to a third party (a factor) at a discount, without the seller being responsible if the debtor fails to pay.