Question
Problem 10-12 LO1, On June 15, Year 2, when the exchange rate was C$ 1: USS$0.82, the City of Windsor entered into a contract with
Problem 10-12 LO1,
On June 15, Year 2, when the exchange rate was C$ 1: USS$0.82, the City of Windsor entered into a contract with a supplier in Detroit to supply it with a total of 10 city buses at a cost of US$200,000 each on April 15, of Year 3. Concerned that the U.S dollar would strengthen in relation to the Canadian dollar, the City of Windsor entered into a forward contract on July 15, Year 2, to hedge this transaction when the spot rate was C$1: US$0.76 and the 270 day forward rate was C$1: US$0.72. The City of Windsor took delivery and made payment on April 15, Year 3 when the exchange rate was C$ 1: US$0.75. The City of Windsors yearend is December 31 and on this date the spot rate was C$1: US$0.71 and the forward rate for April 15 was C$1: USS0.74.
Required (a) Is the forward contract a hedge of a monetary liability or the hedge of a future commitment? (b) Determine if the hedge was entered into at a premium or at a discount and the value of the premium or discount?
(c) Show the journal entries to record the transactions if the hedge was accounted for as (i) a fair value hedge and (ii) a cash flow hedge.
On June 15, Year 2, when the exchange rate was C $1 : US $0.82, the City of Windsor entered into a contract with a supplier in Detroit to supply it with a total of 10 city buses at a cost of US $200,000 each on April 15, of Year 3. Concerned that the U.S dollar would strengthen in relation to the Canadian dollar, the City of Windsor entered into a forward contract on July 15, Year 2, to hedge this transaction when the spot rate was C\$1: US $0.76 and the 270 day forward rate was C $1 : US $0.72. The City of Windsor took delivery and made payment on April 15, Year 3 when the exchange rate was C\$1: US $0.75. The City of Windsor's year-end is December 31 and on this date the spot rate was C $1 : US $0.71 and the forward rate for April 15 was C $1 : US $0.74. Required (a) Is the forward contract a hedge of a monetary liability or the hedge of a future commitment? (b) Determine if the hedge was entered into at a premium or at a discount and the value of the premium or discount? (c) Show the journal entries to record the transactions if the hedge was accounted for as (i) a fair value hedge and (ii) a cash flow hedge
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