Question
On October 1, 2019, Diamond Company purchased inventory from Ruby Red Corporation for EURO () 200,000, with payment due on February 1, 2020. On October
On October 1, 2019, Diamond Company purchased inventory from Ruby Red Corporation for EURO () 200,000, with payment due on February 1, 2020. On October 1, 2019, Ruby Red delivered the inventory to Diamond from its Toronto warehouse. Diamond immediately hedged 170,000 of the payable by buying a forward contract (at no cost) expiring on February 1, 2020. The following exchange rates occurred during the period (the forward rates shown all pertain to forward contracts expiring on
February 1, 2020):
Spot Rate Forward Rate
October 1, 2019 1 = C$1.40 1 = C$1.50
December 31, 2019 1 = C$1.48 1 = C$1.59
February 1, 2020 1 = C$1.52 1 = C$1.52
REQUIRED:
a) Indicate how the hedge entered into by Diamond on October 1, 2019 should be classified. Support your answer with facts from the question and discuss how effectivethis hedge would be. (3 marks)
b) Prepare the journal entries or disclosure to be recorded by Diamond for the accounts payable and the fair value hedge on the following dates: (8 marks)
i) October 1, 2019
ii) December 31, 2019
iii) February 1, 2020
c) Calculate the exchange gain or loss on both the accounts payable and the forward contract to be reported for the year ended December 31, 2019 (January 1 December 31, 2019) (2 marks).
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