On November 1, 20X3, Blue Mussels Company issued a purchase order to Rainy Company, a Spanish company, to purchase equipment for €100,000. The equipment was to be delivered and payment was to be made (in euros) on February 1, 20X4.
Blue Mussels Company has a €100,000 receivable due on February 1, 20X4, from Bonbon Company, a French company, which it designates as a hedge against the commitment. The spot rate for the euro was $1.42 on November 1, 20X3. On December 31, 20X3, the spot rate was $1.40. Rainy Company delivered the equipment to Blue Mussels Company and Blue Mussels Company collected the receivable and paid the amount due on February 1, 20X4, per the purchase order. The spot rate was $1.37 on February 1.
Required
1. Assume that the hedge is designated as a cash-flow hedge. Prepare journal entries to record the acquisition of the equipment and the related hedge on Blue Mussels Company’s books through February 1, 20X4. Assume Blue Mussels Company’s fiscal year ends on December 31.
2. Assume that the hedge is designated as a fair-value hedge. Prepare journal entries to record the acquisition of the equipment and the related hedge on Blue Mussels Company’s books through February 1, 20X4. Assume Blue Mussels Company’s fiscal year ends on December 31.
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