On September 30, 2020, Chicken Ltd., a Canadian company, entered into a contract to purchase goods from Wing Ltd., a foreign corporation. The terms of the contract call for the goods to be delivered to Chicken Ltd.'s Edmonton location on May 30, 2021. The cost of goods is EUR $1,000,000 to be settled on July 31, 2021. On September 30, 2020, Chicken Ltd. also arranged for a forward contract through its bank for EUR $1,000,000. The goods were delivered on time, and Chicken Ltd, settled with Wing Ltd. on July 31, 2021. Chicken Ltd. has a April 30 year-end. The spot and forward rates are as follows: Spot Rate ($CAD) 1 USD = x.xX CAD Forward Rate ($CAD) 1 USD = XXX CAD September 30, 2020 $1.42 $1.46 April 30, 2021 $1.44 $1.48 May 30, 2021 $1.45 $1.49 July 31, 2021 $1.50 $1.50 Required Prepare Chicken Ltd.'s journal entries to reflect the above assuming that: a. the hedge is a cash flow hedge, and b. the hedge is a fair value hedge.
On September 30, 2020, Chicken Ltd., a Canadian company, entered into a contract to purchase goods from Wing Ltd., a foreign corporation. The terms of the contract call for the goods to be delivered to Chicken Ltd.'s Edmonton location on May 30, 2021. The cost of goods is EUR $1,000,000 to be settled on July 31, 2021. On September 30, 2020, Chicken Ltd. also arranged for a forward contract through its bank for EUR $1,000,000. The goods were delivered on time, and Chicken Ltd, settled with Wing Ltd. on July 31, 2021. Chicken Ltd. has a April 30 year-end. The spot and forward rates are as follows: Spot Rate ($CAD) 1 USD = x.xX CAD Forward Rate ($CAD) 1 USD = XXX CAD September 30, 2020 $1.42 $1.46 April 30, 2021 $1.44 $1.48 May 30, 2021 $1.45 $1.49 July 31, 2021 $1.50 $1.50 Required Prepare Chicken Ltd.'s journal entries to reflect the above assuming that: a. the hedge is a cash flow hedge, and b. the hedge is a fair value hedge.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
On September 30, 2020, Chicken Ltd., a Canadian company, entered into a contract to purchase goods
from Wing Ltd., a foreign corporation. The terms of the contract call for the goods to be delivered to
Chicken Ltd.'s Edmonton location on May 30, 2021. The cost of goods is EUR $1,000,000 to be settled on
July 31, 2021.
On September 30, 2020, Chicken Ltd. also arranged for a forward contract through its bank for EUR
$1,000,000. The goods were delivered on time, and Chicken Ltd, settled with Wing Ltd. on July 31, 2021.
Chicken Ltd. has a April 30 year-end.
The spot and forward rates are as follows:
| Spot Rate ($CAD) 1 USD = x.xX CAD |
Forward Rate ($CAD) 1 USD = XXX CAD |
||
| September 30, 2020 | $1.42 | $1.46 | |
| April 30, 2021 |
$1.44 | $1.48 | |
| May 30, 2021 | $1.45 | $1.49 | |
| July 31, 2021 | $1.50 | $1.50 |
Required
Prepare Chicken Ltd.'s
a. the hedge is a cash flow hedge, and
b. the hedge is a fair value hedge.
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