On September 1, 20X1, True North Ltd., a Canadian company, entered into an agreement with Langdon Ltd., a foreign company, to purchase inventory for 100,000FC. The inventory is to be delivered on February 15, 20X2. In accordance with the agreement, True North will make payment on March 15, 20X2. On September 2, 20X1, True North's bank arranged for a 100,000FC hedge against True North's commitment to Langdon. The spot rate on September 2 was 1FC = $3.60 CDN and the March 15, 20X2 forward rate was 1FC = $3.64 CDN. At True North's December 31, 20X1 year-end, the spot rate was 1FC = $3.63 CDN and the forward rate to March 15, 20X2 was 1FC = $3.65 CDN. When Langdon delivered the merchandise to True North on February 15, 20X2, the spot rate was 1FC = $3.66 CDN and the forward rate was 1FC = $3.675 CDN. True North paid Langdon on March 15, as required. On that date, the spot rate was 1FC = $3.69 CDN. Required: The hedge arranged by True North is a cash hedge. Prepare the journal entries to record the acquisition of the inventory and the related hedge through to March 15, 20X2 using the net method.

On September 1, 20X1, True North Ltd., a Canadian company, entered into an agreement with Langdon Ltd., a foreign company, to purchase inventory for 100,000FC. The inventory is to be delivered on February 15, 20X2. In accordance with the agreement, True North will make payment on March 15, 20X2. On September 2, 20X1, True North's bank arranged for a 100,000FC hedge against True North's commitment to Langdon. The spot rate on September 2 was 1FC = $3.60 CDN and the March 15, 20X2 forward rate was 1FC = $3.64 CDN. At True North's December 31, 20X1 year-end, the spot rate was 1FC = $3.63 CDN and the forward rate to March 15, 20X2 was 1FC = $3.65 CDN. When Langdon delivered the merchandise to True North on February 15, 20X2, the spot rate was 1FC = $3.66 CDN and the forward rate was 1FC = $3.675 CDN. True North paid Langdon on March 15, as required. On that date, the spot rate was 1FC = $3.69 CDN. Required: The hedge arranged by True North is a cash hedge. Prepare the journal entries to record the acquisition of the inventory and the related hedge through to March 15, 20X2 using the net method.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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