Blossom Exporting Co is a US wholesaler engaged in foreign trade The following transactions are representative of its business dealings The company uses a periodic inventory system and is on a...

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Blossom Exporting Co. is a U.S. wholesaler engaged in foreign trade. The following transactions are representative of its business dealings. The company uses a periodic inventory system and is on a calendar-year basis. All exchange rates are direct quotations. Dec. 1 Blossom Exporting purchased merchandise from Chang's Ltd., a Hong Kong manufacturer. The invoice was for 260,000 Hong Kong dollars, payable on April 1. On this same date, Blossom Exporting acquired a forward contract to buy 260,000 Hong Kong dollars on April 1 for $\$ 0.1314$. Dec. 29 Blossom Exporting sold merchandise to Zintel Retailers for 190,000 Hong Kong dollars, receivable in 90 days. No hedging was involved. April 1 Blossom Exporting received 190,000 Hong Kong dollars from Zintel Retailers. April 1 Blossom Exporting submitted full payment of 260,000 Hong Kong dollars to Chang's, Ltd., after obtaining the 260,000 Hong Kong dollars on its forward contract. Spot rates and the forward rates for the Hong Kong dollar were as follows: \begin{tabular}{lrr} & Spot Rate & \begin{tabular}{r} Forward Rate for \\ April 1 Delivery \end{tabular} \\ \hline Dec. 1 & $\$ 0.1265$ & $\$ 0.1314$ \\ Dec. 29 & 0.1240 & 0.1305 \\ Dec. 31 & 0.1259 & 0.1308 \\ April 1 & 0.1430 & \end{tabular} (a) Prepare journal entries for the transactions including the necessary adjustments on December 31. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 amounts. List all debit entries before credit entries.)

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**Journal Entries:** **December 1** - Debit: Inventory 33,482 - Credit: Accounts Payable 33,482 (To record the purchase of merchandise) - Debit: Prepaid Forward Contracts 3,398 - Credit: Cash 3,398 (To record the forward contract to buy Hong Kong dollars) **December 29** - Debit: Accounts Receivable 23,560 - Credit: Sales Revenue 23,560 (To record the sale of merchandise) **December 31** - Debit: Foreign Exchange Gain 580 - Credit: Inventory 580 (To adjust the inventory to the spot rate of $0.1259) **April 1** - Debit: Accounts Payable 33,482 - Credit: Cash 33,482 (To record the payment to Chang's Ltd.) - Debit: Cash 27,020 - Credit: Accounts Receivable 27,020 (To record the receipt from Zintel Retailers)

Follow-up Knowledge or Question

What is the purpose of using forward contracts in foreign trade transactions?

How do spot rates and forward rates differ in the context of foreign exchange transactions?

Can you explain the concept of hedging in the context of foreign exchange risk management?

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