Question
Tall Ltd.'s (Tall) year-end is on December 31. On November 1, 2022 when the US dollar was worth CDN$1.365, Tall sold merchandise to an American
Tall Ltd.'s (Tall) year-end is on December 31. On November 1, 2022 when the US dollar was worth CDN$1.365, Tall sold merchandise to an American client for US$525,000. Full payment of this invoice was expected by March 1, 2023. On December 1, the spot rate was CDN$1.345, and the three-month forward rate was CDN$1.367. In order to minimize its foreign exchange risk and exposure, Tall entered into a forward contract with its bank on December 1, 2022 to deliver US$525,000 in three months' time. The spot rate at year-end was CDN$1.36 and the forward rate from December 31, 2022 to March 1, 2023 was CDN$1.34. On March 1, 2023, Tall received the US$525,000 from its client and settled its contract with the bank. The forward contract was to be accounted for as a fair value hedge of the US dollar receivable. Tall has not adopted hedge accounting. Significant dates and exchange rates pertaining to this transaction are as follows:
Spot RatesForward Rates*November 1, 2022 (Transaction date)US$1 = CDN$1.365 December 1, 2022 (Hedge date)US$1 = CDN$1.3450US$1 = CDN$1.367December 31, 2022 (Year-end)CDN$1.36CDN$1.34March 1, 2023 (Settlement date)US$1 = CDN$1.368.US$1 = CDN$1.368.*For contracts expiring on March 1, 2023.
How should the forward contract be presented on the balance sheet at December 31, 2022?
Multiple Choice
The forward contract is an executory contract and not reported until settled with the bank on March 1, 2023.
A memorandum entry on December 1, 2022, to note that a forward contract has been entered into is all this is required for reporting.
The forward contract is reported as an asset with a value of $14,175 on the balance sheet.
The forward contract is presented as a liability with a value of $14,175 on the balance sheet.
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