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Question 3: Case study: Adoption of a hedge contract before the date of a sale of goods Cornish Limited exports surfboards to Newquay (UK)
Question 3: Case study: Adoption of a hedge contract before the date of a sale of goods Cornish Limited exports surfboards to Newquay (UK) plc. Newquay (UK) plc placed the order on 1 April 2012. The consignment of surfboards was sold FOB Byron Bay (NSW) on 1 May 2012. The sales price was UK1 million payable on 1 August 2012. A sell hedge forward-rate contract was entered into on 1 April 2012 (before the date of the sale) with ABC Bank for the delivery of Australian dollars in exchange for UK 1 million on 1 August 2012. The forward rate of the contract is $AUS1.00 = UK0.40 on 1 April 2012. Cornish Limited uses cash-flow hedge accounting. Additional Information: The relevant exchange rates are as follows: Date Spot rate Forward rate 1 April 2012 0.35 0.40 1 May 2012 0.30 0.36 30 June 2012 0.25 0.29 1 August 2012 0.37 0.37 Cornish Limited's end of reporting period is 30 June. Required: Prepare the journal entries required to record the hedge for Cornish Limited.
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