Question
Manitoba Exporters Inc. (MEI) sells Inuit carvings to countries throughout the world. On December 1, Year 5, MEI sold 14,500 carvings to a wholesaler in
Manitoba Exporters Inc. (MEI) sells Inuit carvings to countries throughout the world. On December 1, Year 5, MEI sold 14,500 carvings to a wholesaler in a foreign country at a selling price of 694,000 foreign currency units (FCs) when the spot rate was FC1 = $0.831. The invoice required the foreign wholesaler to remit by April 1, Year 6. On December 3, Year 5, MEI entered into a forward contract with the Royal Bank at the 120-day forward rate of FC1 = $0.871 and the spot rate was still FC1 = $0.831. The fiscal year-end of MEI is December 31, and on this date the spot rate was FC1 = $0.847 and the forward rate was FC1 = $0.883. The payment from the foreign customer was received on April 1, Year 6, when the spot rate was FC1 = $0.892. Assume that MEI uses hedge accounting. Also, assume that the forward element and spot elements on the forward contract are accounted for separately. Required: Prepare the journal entries assuming that MEI designates the forward contract as a fair value hedge.
1. The sale and the forward contract
2. Any adjustments required on December 31
3. The cash received in Year 6.
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