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LO 1 , 5 Hedging an Existing Monetary Position On November 1 5 , Year 1 , Domco Ltd . of Montreal bought merchandise from
LO
Hedging an Existing Monetary Position
On November Year Domco Ltd of Montreal bought merchandise from a supplier located in Brunei for Brunei dollars BNDB$ The Brunei dollar was trading at $ on that date, and the terms of the purchase required Domco to pay the account on January Year On December when the spot rate was $$ Domco entered into a forward contract with its bank to receive $ at the day forward rate of $$ On December Year Domco's yearend, the spot rate was B$I $ and the day forward rate was $$ On January Year when the spot rate was $$ Domco settled the forward contract with its bank and paid B $ to the Brunei supplier.
Required
a Prepare the journal entries required in Year and Year assuming that hedge accounting is not applied.
b Prepare a partial statement of financial position as at December Year which shows accounts payable and the forward contract.
c Prepare one journal entry to summarize the combined effect of all entries in part a
d Prepare the journal entries required in Year and Year assuming that the forward contract is designated as a fair value hedge and is segregated between the spot element and forward element.
e Prepare one journal entry to summarize the combined effect of all entries in part d
f Explain the similarities and differences between the two methods of accounting for the forward contract.
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