A. Answers to 1) - 4) are based on the following information TEL is based in Toronto, Ontario. It imports digital products from Europe and sells it to dealers throughout North America. It has a December 31 fiscal year end. On November 1, 2019, TEL signed a non-binding contract to sell products with a customer in the United States for $800,000 USD. The products were delivered on December 25, 2019. Under the terms of the contract, payment was due on January 31, 2020. On November 30, 2019, TEL hedged the transaction by entering a forward contract to sell $800,000 USD to its bank on January 31, 2020 at a rate of $1USD= $1.20 CAN. TEL opted to apply hedge accounting. Exchange rates were as follows: $ 1 USD = CAN$ Spot rate Forward rate .99 1.2 1.3 1.3 1.2 1.5 1.3 1.4 1.1 January 1, 2019 1.0 November 1, 2019 November 30, 2019 December 25, 2019 December 31, 2019 January 31, 2020 1) What is the fair value of the hedged item that needs to be reported on TEL's separate- entity balance sheet as of Dec 31, 2019? 2) What is the total cumulative gain or loss from the hedged item up to Dec 31, 2019? 3) What is the fair value of the hedging item as of Dec 31, 2019? Should it be reported on the balance sheet as assets or liabilities? 4) Evaluate the effectiveness of the hedge on the settlement day using supportive numbers. 1.3 1.4 A. Answers to 1) - 4) are based on the following information TEL is based in Toronto, Ontario. It imports digital products from Europe and sells it to dealers throughout North America. It has a December 31 fiscal year end. On November 1, 2019, TEL signed a non-binding contract to sell products with a customer in the United States for $800,000 USD. The products were delivered on December 25, 2019. Under the terms of the contract, payment was due on January 31, 2020. On November 30, 2019, TEL hedged the transaction by entering a forward contract to sell $800,000 USD to its bank on January 31, 2020 at a rate of $1USD= $1.20 CAN. TEL opted to apply hedge accounting. Exchange rates were as follows: $ 1 USD = CAN$ Spot rate Forward rate .99 1.2 1.3 1.3 1.2 1.5 1.3 1.4 1.1 January 1, 2019 1.0 November 1, 2019 November 30, 2019 December 25, 2019 December 31, 2019 January 31, 2020 1) What is the fair value of the hedged item that needs to be reported on TEL's separate- entity balance sheet as of Dec 31, 2019? 2) What is the total cumulative gain or loss from the hedged item up to Dec 31, 2019? 3) What is the fair value of the hedging item as of Dec 31, 2019? Should it be reported on the balance sheet as assets or liabilities? 4) Evaluate the effectiveness of the hedge on the settlement day using supportive numbers. 1.3 1.4
