Description
In this week’s Required Readings from your course textbook, you have a specific and detailed example of hedging a forecasted foreign currency transaction to hedge an anticipated but not yet committed purchase of inventory using a foreign currency cash flow hedge (Case 3 on Pages 577-579) and hedging an unrecognized foreign currency firm commitment using a foreign currency fair value hedge (Case 2 on Pages 573-577).
It is important for you to demonstrate your understanding of the accounting rules and resulting journal entries that surround these concepts, as especially multinational corporations face determining the impact on their financial statements of these types of foreign currency related transactions on almost a daily basis, and of course when they close their books on a monthly and/or quarterly and annual basis.
Create your own specific and detailed example of either one of these types of foreign currency transactions, from the beginning of the use of the foreign currency contract to the end of the use or the settlement of the foreign currency contract. Show the required journal entries required at each respective date, including an explanation of the basis of each of your journal entry calculations and the authoritative support for each entry following the US GAAP. Make sure your journal entries are clear with regards to which financial statement account is affected by each of your journal entries (balance sheet; income statement; Other Comprehensive Income; etc.).