Mini Case for Assignment 1

Out Of This Galaxy (OTG) is an astro-science supplier located in Hamilton, Ontario. It

supplies planetariums with materials to put on their star shows. All of OTGs

previous business has been to Canadian customers, but OTG has expanded its

customer base and has just made its first international sale. The selling price of the

goods was FC200,000. OTGs CFO entered the company into a forward contract to

help with risk management, but has since left the company. The companys CEO is

not sure what a forward contract is, and the companys small accounting

department has never heard of a forward contract either. OTGs year end is

December 31st.

You, CPA, have been asked for the following:

1. Advise OTG on forward contracts and discuss any relevant information

and/or implications, given that OTG has already entered into the forward

contract.

2. Prepare the journal entries required, assuming that this contract will be

designated as a cash flow hedge.

* Note that FC = Foreign Currency

The information that you have related to the Forward Contract are as following:

Date of Sale: October 15, Y1

Date of Delivery of goods: January 30, Y2

Forward Contract entered into: October 15, Y1. Spot rate FC1 = $1.20; forward rate

FC1 = $1.22

December 31, Y1 spot rate FC1 = $1.222; 30-day forward rate FC1= $1.231

January 30, Y2 spot rate FC1 = $1.24.

Please use the case format