Question

A New Zealand company has a foreign denominated asset in United States dollars worth US$600,000 on the 1 July 2016. The US debtor is due to repay this debt to the New Zealand company over the next 12 months. The repayments are scheduled to take place during the following date. The Spot rate is NZ$ = US$0.72 and the indicative future spot rates are shown in the table below.

Installment 1: 1 October, 2016 (US$150,000) (NZ$ = US$0.71)

Installment 2: 1 January, 2017 (US$150,000) (NZ$ = US$0.73)

Installment 3: 1 April, 2017 (US$150,000) (NZ$ = US$0.75)

Installment 4: 1 July 2017 (US$150,000) (NZ$ = US$0.77)

Question: Assume the company are able to partner with another company to secure a swap contract that is potentially beneficial to both parties.

Prepare the journal entries to capture the swap contract for the first and second installment.

Other Information: Assume the swap contract between the two parties is exactly matched so that their exposure is exactly offset. When calculating the journal entries, assume the future spot rates are as provided in the above table The US borrowing rate is 5% while the New Zealand deposit rate is 4%.