Question 1 (15 marks)

Our firm purchased equipment for 200,000 Artemedal dollars (AD$) on December 1, 2016. Our year end is December 31, and the payable is due on February 28, 2017. On December 1, 2016, we entered into a forward exchange contract with the bank to provide us with 200,000 ADs on February 28, 2017. This is classified as a fair value hedge.

The following rates were in effect:

Forward Rates:

December 1, 2016; 90 day forward rate

AD$1 = CDN$ .62

December 31, 2016; 60 day forward rate

AD$1 = CDN$ .60

Spot rates:

December 1, 2016

AD$1 = CDN$ .64

December 31, 2016

AD$1 = CDN$ .61

February 28, 2017

AD$1 = CDN$ .59

Required:

Provide all the necessary journal entries to record both the account payable and the hedge.