On August $1,$ Year $3,$ Carleton Ltd$.$ ordered machinery from a supplier in Hong Kong for HK$$500,000.$ The machinery was delivered on October $1,$ Year $3,$ with terms requiring payment in full by December $31,$ Year $3.$ On August $2,$ Year $3,$ Carleton entered a forward contract to purchase HK$$500,000$ on December $31,$ Year $3,$ at a rate of $$0\mathrm{.}165.$ On December $31,$ Year $3,$ Carleton settled the forward contract and paid the supplier.

Exchange rates were as follows:

Spot Rates Forward Rates#

August $1$ and $2,$ Year $3$ HK$$1=$ C$$0\mathrm{.}160$ HK$$1=$ C$$0\mathrm{.}165$

October $1,$ Year $3$ HK$$1=$ C$$0\mathrm{.}164$ HK$$1=$ C$$0\mathrm{.}168$

December $31,$ Year $3$ HK$$1=$ C$$0\mathrm{.}169$ HK$$1=$ C$$0\mathrm{.}169$

#For contracts expiring on December $31,$ Year $3.$

Required:

$($a$)$ Assume that the forward contract was designated as a cash flow hedge of the firm commitment to purchase the machinery, and that the balance in accumulated other comprehensive income on October $1$ was transferred to the machinery account when the machinery was delivered. Prepare the journal entries for Year $3$ to record all the activity described above and prepare a summary journal entry for the combined effect of all entries. $($If no entry is required for a transaction$/$event$,$ select $"$No journal entry required" in the first account field.$)$

$($b$)$ Assume that the forward contract was designated as a fair value hedge of the firm commitment to purchase the machinery and that the balance in the commitment asset$/$liability account on October $1$ was transferred to the machinery account when the machinery was delivered. Prepare the journal entries for Year $3$ to record all the activity described above and prepare a summary journal entry for the combined effect of all entries. $($In cases where no entry is required, please select the option $"$No journal entry required" for your answer to grade correctly. Leave no cells blank $-$ be certain to enter $"0"$ wherever required.$)$

Date General Journal Debit Credit

August $1,$ Year $3$

$($Click to select$)$

Equipment

Cash

Purchase

Commitment liability

Machinery

Accounts payable

Accumulated OCI

Forward contract

Interest receivable

Exchange gains$/$losses

Receivable from bank

OCI

Land

No journal entry required

$($Click to select$)$

Sales

Payable to bank

No journal entry required

Exchange gains$/$losses

Loan payable

OCI

Machinery

Commitment liability

Accounts payable

Recored the contract to purchase machinery.

August $2,$ Year $3$

$($Click to select$)$

OCI

Exchange gains$/$losses

Equipment

Forward contract

No journal entry required

Cash

Commitment liability

Land

Interest receivable

Receivable from bank

Purchase

Accumulated OCI

Accounts payable

Machinery

$($Click to select$)$

$.$

OCI

Cash

Accounts payable

Exchange gains$/$losses

Sales

Loan payable

Payable to bank

No journal entry required

Machinery

Commitment liability

Record the forward contract.

October $1,$ Year $3$

$($Click to select$)$

Cash

Exchange gains$/$losses

Receivable from bank

Machinery

Interest receivable

Commitment liability

Land

Purchase

OCI

Accumulated OCI

Forward contract

Accounts payable

No journal entry required

Equipment

$($Click to select$)$

Machinery

Commitment liability

No journal entry required

Payable to bank

Sales

OCI

Loan payable

Exchange gains$/$losses

Cash

Accounts payable

Record the purchase of machinery.

$($Click to select$)$

Land

OCI

Purchase

Exchange gains$/$losses

Commitment liability

Interest receivable

Cash

No journal entry required

Accounts payable

Equipment

Receivable from bank

Accumulated OCI

Forward contract

Machinery

$($Click to select$)$

Commitment liability

Accounts payable

Payable to bank

Sales

No journal entry required

Machinery

OCI

Cash

Loan payable

Exchange gains$/$losses

Revalue forward contract at fair value.

$($Click to select$)$

Accounts payable

Accumulated OCI

No journal entry required

Exchange gains$/$losses

Equipment

Interest