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Foreign Trade Journal Entries and Forward

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CH 12 - 3 - Foreign Trade Journal Entries and Forward

On December 1, 2008, King Company exported equipment that had cost $210,000
to a Brazilian company for 1,000,000 Real. The account is to be settled on January
31, 2009, King Company is a calendar-year company and uses a perpetual
inventory system. Direct exchange rates were:

Spot
Rate
December 1 $.4441
December 31 .3690
January 31 .4421

A. Prepare journal entries to record the exporting transaction, adjust the accounts on
December 31, and settle the account on January 31.

B. What effect did changes in the exchange rate have on income in 2008 and 2009?

C. Assume the facts given above, except that on December 1, King Company entered
into a forward contract to sell 1,000,000 Real on January 31 for $.4451 per Real.
Prepare the journal entries needed in 2008 and 2009 to record the forward contract
and settle the accounts. The forward rate on December 31 for January 31 delivery was
$.3810.

D. What is the combined effect on income in 2008 and 2009 from the exporting transaction
and the forward contract?

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