Week 6

Problem 10-2 (LO 3, 6) Hedge with forward contract a commitment and subsequent transaction.

Kaiser Exporters buys used medical equipment and sells it to various foreign health care institutions. On June 15, the company committed to sell medical equipment to a foreign hospital for 800,000 FC. The equipment, with a cost of $325,000, was shipped to the customer on August 15 with terms FOB shipping point and payment due on October 15. At the time of the commitment, Kaiser acquired a forward contract to sell 800,000 FC in 120 days. Selected spot and forward rates are as follows:

June 15

June 30

August 15

September 30

Spot rate

$0.500

$0.485

$0.480

$0.470

Forward rate

0.510

0.490

0.475

0.468

The relevant discount rate is 6% and changes in the value of the firm commitment are measured as changes in the forward rate over time. Assume that the hedge is accounted for as a fair value hedge and that the time value of the hedge is included in the assessment of effectiveness.

Required

Assuming that financial statements are prepared for the second and third quarters, identify all relevant income statement and balance sheet accounts for the above transactions and determine the appropriate quarterly balances.