The functional currency of K Co is the US dollar. On 1 January 2010, the management of K Co approved a decision to buy equipment for S$1,400,000. The equipment does not meet the conditions of a qualifying asset as defined by IAS 23 Borrowing Costs. After carrying an intensive search for suppliers, on 30 June 2010, K Co places a noncancellable order to purchase the equipment. The equipment is delivered on 31 December 2010 and the payable is settled on 30 June 2011. The equipment is depreciated over a useful life of ten years with zero residual value.

K Co entered into a foreign exchange (FX) forward transaction on 1 January 2010 with an external broker B Co to buy S$1,400,000 and sell US dollar to hedge the foreign exchange risk in the purchase of equipment. The US$/S$ forward rate is 1.37 (that is, 1 US$ S$1.37) and maturity date is 30 June 2011.

Required
Prepare the journal entries in K Co’s book in 2010 and 2011 for the equipment and foreign exchange (FX) forward in accordance with IFRS 9 Financial Instruments and IAS 21 The Effects of Changes in Foreign Exchange Rates.
Ignore taxes. (Convert the US$/S$ rates to S$/USD$ rates). State the effective FX rates at which the equipment cost and cash settlement are locked in.

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Foreign exchange rates 1 January 2010 Average 1st half 2010 30 June 2010 Average 2nd half 2010 31 December 2010 Average year 2010 Average 1st half 2011 30 June 2011 Average 31 December 2011 Average year 2011 30 June 2012 Average 1st half 2012 2nd half 2011 USD/S$ spot 1.40 1.39 1.38 1.34 1.32 1.36 1.25 1.20 1.24 1.30 1.24 1.28 1.29 USD/S$ forward maturing 30 June 2011 1.37 1.36 1.29 1.33 1.20