On June 15, 2020 Cairns Ltd enters a non-cancellable purchase commitment with US company Mackay Ltd to supply Equipment.The total contract price is US $1 million and is due to be paid on August 31, 2020.

Due to concerns in movements in the foreign exchange rates, on June 15, 2020 Cairns Ltd entered into a forward rate contract on US dollars to receive US $1,000,000 on August 31, 2020.Cairns Ltd elects to treat the hedge as a cash flow hedge.It is assumed that the hedge is effective.

The spot rates are provided below.The forward rates offered on particular dates for delivery of US dollars are also provided.

DateSpot RateFwd Rates

15 June 2020US $0.78$0.75

30 June 2020 US $0.76$0.73

31 August 2020US $0.71$0.71

Note: the purchase is not recognised until such time as the inventory is shipped on 30 June 2020.

1.Discuss why no journal entry is required on June 15, 2020 for the inventory transaction and the foreign instrument?

2.Provide the journals entries to account for the hedged item and the hedging instrument for the months ending June 30, 2020.

3.Provide the amount of the gain or (loss) on the hedged item, show your working.

4.Provide the amount of the gain or (loss) on the hedging instrument, show your working.