Question

On Jan 1 Small Co. purchased inventory from a foreign supplierat a price of 20,000 FCU. (FCU is “foreign currency units.”)

Smalll Co. will make payment in three months on April 1.

On Jan 1 Small Co entered into a forward contract maturing onApril 1as a fair value hedge of its FCU liability.

Small Co. closes its books to prepare interim financialstatements on Jan 31 of each year.

Prepare all journal entries, including adjusting entries, torecord the transaction and the forward contract.

Date	Spot Rate	Forward Rate*
Jan 1	$0.80	$0.85
Jan 31	0.83	$0.84
April 1	$0.86

*Forward rate is for a contract written on Jan 1 to mature onApril 1.

I want to be sure that the answer down below are these thecorrect journal entries because i'm not too sure. Also, do we usethe forward rate on Jan 1? Thank You.

Journal entries:

Jan 1:

Merchandise Inventory Debit (20000 * 0.80) $16000

Accounts Payable Credit (20000 * 0.80) $16000

(Being Good purchased in foreign currency )

Jan 31:

Foreign currency fluctuation debit (20000*0.84 -0.80) $800

Accounts Payable Credit $800

(Being forex fluctuation adjusted)

April 1:

Accounts Payable Debit (20000*$0.84) $16800

Cash Credit $16800

(Being Payment made)