Question 4 10 Marks Norfolk Ltd, an Australian company that uses the Australian dollar (AUD) as its functional currency, imports and sells carpets and other types of floor coverings. Purchases made from foreign suppliers are denominated in foreign currency (FC). An order for FC 100,000 of carpet was placed with a foreign supplier in April 2018 and the inventory was shipped, FOB shipping point, on 1 May 2018. The amount was payable to the foreign supplier on 31 August 2018. Concerned about possible adverse exchange rate changes, Norfolk Ltd entered into a forward rate contract with the Eastpac Bank on 1 May 2018. The terms of the contract were that on 31 August 2018, Norfolk Ltd would deliver AUD to the Eastpac Bank in exchange for FC 100,000 at a forward rate of AUD 1 = FC 0.70. The relevant exchange rates were as follows: Date Spot Rate 1 May 2018 30 June 2018 31 August 2018 AUD 1 = FC 0.80 AUD 1 = FC 0.72 AUD 1 = FC 0.65 Forward rate for delivery of FC on 31 August AUD 1 = FC 0.70 AUD 1 = FC 0.68 AUD 1 = FC 0.65 The hedging arrangement was designated as a fair value hedge. Assume that the hedge arrangement qualified for hedge accounting under AASB 9 Financial Instruments. Also assume a discount rate of 0% for fair value calculations. The end of the reporting period for Norfolk Ltd is 30 June. Required (a) Prepare the journal entries for Norfolk Ltd to account for the above transactions and events. (7 marks) (b) What is foreign exchange risk? How can forward exchange contracts be used to manage foreign exchange risk? (3 marks) Question 4 10 Marks M & H Ltd, an Australian company that uses the Australian dollar (AUD) as its functional currency, manufactures and exports clothing. Sales made to foreign customers are denominated in foreign currency (FC). An order for FC 100,000 of clothing was received from a foreign customer in April 2019 and M & H Ltd shipped the items, FOB Sydney, on 1 June 2019. The amount was payable by the foreign customer on 20 July 2019. Concerned about possible adverse exchange rate changes, M & H Ltd entered into a forward rate contract with the Eastpac Bank on 1 June 2019. The terms of the contract were that on 20 July 2019, the Eastpac Bank would deliver AUD to M & H Ltd in exchange for FC 100,000 at a forward rate of AUD 1 = FC 1.06. The relevant exchange rates were as follows: Date Spot Rate 1 June 2019 30 June 2019 20 July 2019 AUD 1 = FC 1.05 AUD 1 = FC 1.07 AUD 1 = FC 1.09 Forward rate for delivery of FC on 20 July AUD 1 = FC 1.06 AUD 1 = FC 1.08 AUD 1 = FC 1.09 The hedging arrangement was designated as a fair value hedge. Assume that the hedge arrangement qualified for hedge accounting under AASB 9 Financial Instruments. Also assume a discount rate of 0% for fair value calculations. The end of the reporting period for M & H Ltd is 30 June. Required Pre the journal entries for M & H Ltd to account for the above transactions and events. (7 marks) (b) Explain how the accounting treatment of a forward contract designated as a hedging instrument of a firm commitment differs from a forward contract designated as a hedging instrument of a highly probable forecast transaction. (3 marks) Question 4 10 Marks Norfolk Ltd, an Australian company that uses the Australian dollar (AUD) as its functional currency, imports and sells carpets and other types of floor coverings. Purchases made from foreign suppliers are denominated in foreign currency (FC). An order for FC 100,000 of carpet was placed with a foreign supplier in April 2018 and the inventory was shipped, FOB shipping point, on 1 May 2018. The amount was payable to the foreign supplier on 31 August 2018. Concerned about possible adverse exchange rate changes, Norfolk Ltd entered into a forward rate contract with the Eastpac Bank on 1 May 2018. The terms of the contract were that on 31 August 2018, Norfolk Ltd would deliver AUD to the Eastpac Bank in exchange for FC 100,000 at a forward rate of AUD 1 = FC 0.70. The relevant exchange rates were as follows: Date Spot Rate 1 May 2018 30 June 2018 31 August 2018 AUD 1 = FC 0.80 AUD 1 = FC 0.72 AUD 1 = FC 0.65 Forward rate for delivery of FC on 31 August AUD 1 = FC 0.70 AUD 1 = FC 0.68 AUD 1 = FC 0.65 The hedging arrangement was designated as a fair value hedge. Assume that the hedge arrangement qualified for hedge accounting under AASB 9 Financial Instruments. Also assume a discount rate of 0% for fair value calculations. The end of the reporting period for Norfolk Ltd is 30 June. Required (a) Prepare the journal entries for Norfolk Ltd to account for the above transactions and events. (7 marks) (b) What is foreign exchange risk? How can forward exchange contracts be used to manage foreign exchange risk? (3 marks) Question 4 10 Marks M & H Ltd, an Australian company that uses the Australian dollar (AUD) as its functional currency, manufactures and exports clothing. Sales made to foreign customers are denominated in foreign currency (FC). An order for FC 100,000 of clothing was received from a foreign customer in April 2019 and M & H Ltd shipped the items, FOB Sydney, on 1 June 2019. The amount was payable by the foreign customer on 20 July 2019. Concerned about possible adverse exchange rate changes, M & H Ltd entered into a forward rate contract with the Eastpac Bank on 1 June 2019. The terms of the contract were that on 20 July 2019, the Eastpac Bank would deliver AUD to M & H Ltd in exchange for FC 100,000 at a forward rate of AUD 1 = FC 1.06. The relevant exchange rates were as follows: Date Spot Rate 1 June 2019 30 June 2019 20 July 2019 AUD 1 = FC 1.05 AUD 1 = FC 1.07 AUD 1 = FC 1.09 Forward rate for delivery of FC on 20 July AUD 1 = FC 1.06 AUD 1 = FC 1.08 AUD 1 = FC 1.09 The hedging arrangement was designated as a fair value hedge. Assume that the hedge arrangement qualified for hedge accounting under AASB 9 Financial Instruments. Also assume a discount rate of 0% for fair value calculations. The end of the reporting period for M & H Ltd is 30 June. Required Pre the journal entries for M & H Ltd to account for the above transactions and events. (7 marks) (b) Explain how the accounting treatment of a forward contract designated as a hedging instrument of a firm commitment differs from a forward contract designated as a hedging instrument of a highly probable forecast transaction