Exercise 4 (LO 3, 6) Fair value hedge with forward contract. Stark Inc. placed an order for inventory costing 500,000 FC with a foreign vendor on April 15 when the spot rate was 1 FC ¼ $0.683. Stark received the goods on May 1 when the spot rate was 1 FC ¼ $0.687. Also on May 1, Stark entered into a 90-day forward contract to purchase 500,000 FC at a for- ward rate of 1 FC ¼ $0.693. Payment was made to the foreign vendor on August 1 when the spot rate was 1 FC ¼ $0.696. Stark has a June 30 year-end. On that date, the spot rate was 1 FC ¼ $0.691, and the forward rate on the contract was 1 FC ¼ $0.695. Changes in the current value of the forward contract are measured as the present value of the changes in the forward rates over time. The relevant discount rate is 6%.

1.     Prepare all relevant journal entries suggested by the above facts assuming that the hedge is designated as a fair value hedge.

 

2.     Prepare a partial income statement and balance sheet as of the company’s June 30 year-end that reflect the above facts.

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