Question
Hull Manufacturing Corp. (HMC), a Canadian company, manufactures instruments used to measure the moisture content of barley and wheat. The company sells primarily to the
Hull Manufacturing Corp. (HMC), a Canadian company, manufactures instruments used to measure the moisture content of barley and wheat. The company sells primarily to the domestic market, but in Year 3, it developed a small market in Argentina. In Year 4, HMC began purchasing semi-finished components from a supplier in Romania. The management of HMC is concerned about the possible adverse effects of foreign exchange fluctuations. To deal with this matter, all of HMCs foreign-currency-denominated receivables and payables are hedged with contracts with the companys bank. The year-end of HMC is December 31.
The following transactions occurred late in Year 4:
- On October 15, Year 4, HMC purchased components from its Romanian supplier for 815,000 Romanian leus (RL). On the same day, HMC entered into a forward contract for RON815,000 at the 60-day forward rate of RON1 = $0.423. The Romanian supplier was paid in full on December 15, Year 4.
- On December 1, Year 4, HMC made a shipment to a customer in Argentina. The selling price was 2,515,000 Argentinean pesos (ARS), with payment to be received on January 31, Year 5. HMC immediately entered into a forward contract for ARS2,515,000 at the two-month forward rate of ARS1 = $0.241.
During this period, the exchange rates were as follows:
Spot Rates | Forward Rates | |
October 15, Year 4 | RON1 = $0.410 | |
December 1, Year 4 | ARS1 = 0.264 | |
December 15, Year 4 | RON1 = $0.402 | |
December 31, Year 4 | ARS1 = $0.248 | ARS1 = $0.237 |
Hedge accounting is not adopted.
Required:
(a) Prepare the Year 4 journal entries to record the transactions described above and any year-end adjusting entries.
-
1
Record the purchase of inventory.
-
2
Record the forward contract entered for Romanian leus
-
3
Record the forward contract entered for Argentinean pesos
-
4
Record the forward contact.
-
5
Revalue accounts payable at fair value.
-
6
Revalue forward contract at fair value.
-
7
Record the receipt from bank.
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