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On February 1, 2011, Linber Co forecasted the purchase of component parts on May 1, 2011, at a price of 100,000 euros

On February 1, 2011, Linber Co forecasted the purchase of component parts on May 1, 2011, at a price of 100,000 euros
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ACCOUNTING

On February 1, 2011, Linber Co forecasted the purchase of component parts on May 1, 2011, at a price of 100,000 euros. On that date, Linber entered into a forward contract to purchase 100,000 euros on May 1, 2011. It designated the forward contract as a cash flow hedge of the forecasted transaction. The spot rate for euros on Feb 1, 2011, is $1 per euro. On May 1, 2011, the forward contract was settled, and the component parts were received and paid for. The parts  were consumed in the second quarter of 2011. Linber's financial statements reported the following amounts related to this cash flow hedge (credit balances in parenthesis):

Income Statement First Quarter 2011 Second Quarter 2011
Premium expense $4,000 $2,000
COGS -0- 103,000
Adj to net income -0- 3,000

Balance Sheet 3/31/11 5/1/11
Fwd contract (liability) ($1,980)* -0-
AOCI (credit) (2,020) -0-
Change in cash -0- ($106,000)
*2,000 * 0.9901=1,980 where .09901 is the present value for one month at an annual interest rate of 12% calculated as 1/1.01

Required
1. On January 15, 2011 what was the U.S. dollar per euro forward rate to May 1, 2011?
2. On March 31, 2011 what was the U.S. dollar per euro forward rate to May 1, 2011?
3. Was Libner better off or worse off as a result of having entered into this cash flow hedge of a forecasted transaction? By what amount?
4. What does the total premium expense of $6,000 reflect?

 

FILE: MS WORD

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