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

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 fair value hedge; prepare journal entries for this sales transaction and forward contract.