a us company took delivery from a canadian firm of inventory costing 500,000. co

Question

a us company took delivery from a canadian firm of inventory costing 500,000. concurrently the company entered into a forward contract ACCT4300 Advanced Accounting II Group Test 2 Part I: (Foreign Currency Transaction) On 10/17/2017, A U.S. company (which has a 12/31 year-end) took delivery from a Canadian firm of inventory costing C$500,000. Payment is due in 90 days. Concurrently the company entered into a forward contract to buy C$500,000 in 90 days at 1 CS $1.05. Direct exchange rates for CS on the respective dates are as follows: Date 10/17/2017 12/31/2017 Spot Rate 1.04 1.08 /15/2018 1.01 Forward Rate (Delivery on 1/15/2018 1.05 1.07 Required: Prepare all entries related to this transaction, assuming that the payment was made on 1/15/2018

Explanation / Answer

Answer :-

Transaction Entries Date Particulars Debit Credit 10/17/17 Purchase $520,000           To Accounts Payable $520,000 Inventory purchased of C$500,000 with spot rate of 1.04 10/17/17 Dealer $525,000           To Dollars Payable to Exchange Dealer $525,000 Forward contract to buy C$500,000 at C$ = $1.05 12/31/17 Transaction Loss $20,000           To Accounts Payable $20,000 Spot rate increased from 1.04 to 1.08 hence accounts payable increased 12/31/17 FC Receivable from Exchange Dealer $10,000           To Transaction Gain $10,000 Spot rate increased from 1.05 to 1.07 hence FC receivable increased 1/15/18 Accounts Payable $15,000           To Transaction Gain $15,000 Spot rate decreased from 1.04 to 1.01 hence accounts payable is decreased 1/15/18 Transaction Loss $20,000           To FC Receivable from Exchange Dealer $20,000 Spot rate decreased from 1.05 to 1.01 hence FC receivale is decreased 1/15/18 Dollars Payable to Exchange Dealer $525,000 Investment in FC (C$500,000) $505,000           To FC Receivable from Exchange Dealer $505,000           To Cash $525,000 Payment recorded to exchange dealer & receipt of C$500,000 1/15/18 Accounts Payable $505,000           To Investment in FC (C$500,000) $505,000 Payment of liability upon transfer of C$500,000

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