Question

2. On March 1, 2010, Jacoby Ltd., a Canadian company, entered into a contract to buy supplies from Hornblower Co., a foreign company, for FC400,000. The contract requires Hornblower to deliver the supplies to Jacoby on July 15, 2010. Payment is required to be made in full upon delivery. On March 1, 2010, Jacoby entered into a forward contract with the bank to purchase FC400,000 on July 15, 2010. As promised, Hornblower delivered the goods on July 15th and payment was made in full. Jacoby has a June 30th year end date.

Spot Rate Forward Rate

March 1, 2010 FC1 = 4.80 CAD FC1 = 4.92 CAD

June 30, 2010 FC1 = 4.83 CAD FC1 = 4.88 CAD

July 15, 2010 FC1 = 4.85 CAD FC1 = 4.85 CAD

Prepare Jacoby Ltd.'s journal entries

a. assuming the forward contract is a cash flow hedge

b. assuming the forward contract is a fair value hedge

Answer 1

Jacoby Ltd.
Journal entry
a. assuming the forward contract is a cash flow hedge
Date	General Journal	Debit	Credit
March, 01	No entry
June, 30	Other comprehensive expenses	36,000 CAD
	Derivative position(Liabilities)		36,000 CAD
	(FC400,000 x (4.92 CAD - 4.83 CAD)
July, 15	Derivative position(Liabilities)	8,000 CAD
	Other comprehensive expenses		8,000 CAD
	(FC400,000 x (4.83 CAD - 4.85 CAD)
July, 15	Derivative position(Liabilities)	28,000 CAD
	Supplies	1,968,000 CAD
	Other comprehensive expenses		28,000 CAD
	Cash (400,000x4.92)		1,968,000 CAD
	(Being final settlement made)
a. assuming the forward contract is a fair value hedge
Date	General Journal	Debit	Credit
March, 01	No entry
June, 30	P & L Account	36,000 CAD
	Supplies		36,000 CAD
	(FC400,000 x (4.92 CAD - 4.83 CAD)
July, 15	Supplies	8,000 CAD
	P & L Account		8,000 CAD
	(FC400,000 x (4.83 CAD - 4.85 CAD)
July, 15	Supplies	1,996,000 CAD
	P & L Account		28,000 CAD
	Cash (400,000x4.92)		1,968,000 CAD
	(Being final settlement made)