China Corporation purchases a machine on April 15, 2013, to be delivered on June
ID: 2569751 • Letter: C
Question
China Corporation purchases a machine on April 15, 2013, to be delivered on June 15, 2013, in the amount of $1,000,000 denominated in U.S. dollars. Immediately thereafter, China enters into a forward foreign exchange contract to buy $1,000,000 denominated in U.S. dollars on July 15, 2013, for $1,020,408 denominated in Canadian dollars.
The following Rates apply to the transaction:
My Transcription:
Dates for 2013
C$1 = US $X Spot Rate
C$1 = US $X Forward Rate
15-Apr
0.9810
0.9800
30-Apr
0.9822
0.9815
31-May
0.9807
0.9789
15-Jun
0.9810
0.9805
30-Jun
0.9830
0.9825
15-Jul
0.9820
0.9820
Required:
1) Prepare all the journal entries regarding this cash flow hedge assuming that the company prepares monthly financial statements and does not use hedge accounting.
2) Prepare all the journal entries regarding this cash flow hedge assuming that the company prepares monthly financial statements and does use hedge accounting.
3) What is the benefit of using hedge accounting?
Dates for 2013
C$1 = US $X Spot Rate
C$1 = US $X Forward Rate
15-Apr
0.9810
0.9800
30-Apr
0.9822
0.9815
31-May
0.9807
0.9789
15-Jun
0.9810
0.9805
30-Jun
0.9830
0.9825
15-Jul
0.9820
0.9820
Dates for 2013 | C$1 = US $X Spot Rate C$1 US $X Forward Rate 31-Ma 15-Jun 30-Jun 15-Jul 0.9810 0.9822 0.9807 0.9810 0.9830 0.9820 0.9800 0.9815 0.9789 0.9805 0.9825 0.9820Explanation / Answer
1.)
Foreign Currency Option $1000
To Cash $1000
Foreign Currency Option $1,000
To Gain on Foreign Currency Option $1,000
Loss on Firm Commitment $500
Firm Commitment $500
[($.0.9815 - $.9810) x 1000000 = $500]
2.
Foreign Currency Option $2000
To Cash $2000
Option Expense $300
To Foreign Currency Option $300
3.)Due to Hedge Accounting the loss amount reduced
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