Question
XYZ manufactures and distributes leather furniture to various companies in Europe. On April 2, 2006, XYZ entered into a sales contract with a company in
XYZ manufactures and distributes leather furniture to various companies in Europe. On April 2, 2006, XYZ entered into a sales contract with a company in Germany to sell 1,000 sofas. The contract price is 2,000 per sofa. Five hundred sofas are to be delivered in May 15, 2006, and the remaining half is to be delivered on December 20, 2006. Payment is due in two instalments, with half due on August 31, 2006, and the remaining half due January 30, 2007. However, the customer has the right to cancel the contract with 30 days' notice.
XYZ entered into a forward contract to hedge against the euro exchange rate for 1 million, each coming due on January 30, 2007. XYZ has an October 31 year-end.
Delivery of the furniture occurred on the dates specified and the company collected the receivables due
and settled the forward contract January 30, 2007.
The exchange rates were as follows:
Canadian equivalent of euro | Spot rate | Forward rate to January 30, 2007 |
April 2, 2006 | 1.50 | 1.54 |
June 30, 2006 | 1.51 | 1.57 |
August 31, 2006 | 1.53 | 1.58 |
October 31, 2006 | 1.55 | 1.56 |
December 20, 2006 | 1.59 | 1.61 |
January 30, 2007 | 1.63 | settled |
Required:
Assume that the forward contract is designated as a cash flow hedge, since the sale is highly probable. Prepare the journal entries to record the sales and the hedge. Use the net method to record the journal entries. XYZ reports under IFRS.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started