Question
Answer BOTH Part A and Part B Part A: On 1st February 2020 an Australian Company purchased inventory from an overseas customer for a price
Answer BOTH Part A and Part B
Part A: On 1st February 2020 an Australian Company purchased inventory from an overseas customer for a price of FC$100,000. Payment was made on 1st June. Exchange rates were: 1st February $A 1.00 = $FC 2.50, 1st June $A 1.00 = $FC 2.00
Record the journal entry/entries for the purchase on 1st February.
Then record the journal entry/entries for on 1st June (when payment is made, remembering there may be a gain or loss as well as the payment).
Part B: On 1st January 2020 Edward Enterprises (an Australian business) contracted to sell inventory to a buyer in the USA. The inventory is to be delivered on 22nd March 2020. $100,000 USD is receivable on delivery. Edward Enterprises takes out a forward contract on 1st January 2020 to sell $100,000 USD on 22nd March 2020 at AUS/USD of $1.45. At 22nd March the spot rate is $1.75 (actual rates are being used).
Record the journal entry/entries for Edward for the receipt from the sale on 22nd March when the inventory is delivered.
Then record the journal entry/entries for the cash settlement of the hedge (the derivative) on 22nd March.
With hindsight, discuss if Edward Enterprises made the right financial decision in taking out a hedge (derivative, forward contract).
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