Question

EnDur Corp (EDC) is a Canadian company that exports computer software. On February l, Year 2, EDC contracted to sell software to a customer in Denmark at a selling price of 600,000 Danish krona (DK) with payment due 60 days after installation was complete. On February 2, Year 2, EDC entered into a forward contract with the Royal Bank at the five-month forward rate of CDN$1 5 DK5.20. The installation was completed on April 30, Year 2. On June 30, Year 2, the payment from the Danish customer was received and the forward contract was settled.

Exchange rates were as follows:

	Spot rates	Forward rates
February 1 and 2, Year 2	$1 5 DK5.06	$1 5 DK5.20
April 30, Year 2	$1 5 DK5.09	$1 5 DK5.18
June 30, Year 2	$1 5 DK5.14	$1 5 DK5.14

Required:

(a) Assume that the forward contract was designated as a cash flow hedge of the anticipated sale and that the entire balance in accumulated other comprehensive income (AOCI) on April 30 was transferred to sales when the installation was completed. Calculate the following amounts for the financial statements for the year ended June 30, Year 2:

(i) Sales

^{(ii) Exchange gains/losses}

^{(iii) Cash flows for the period}

(b) Assume that EDC could have entered into a three-month forward contract on February 2, Year 2, to hedge the sale of the software with a forward rate of $1 5 DK5.15. If so, this forward contract would have fixed the sales price for the software. Also, assume that the amount transferred from AOCI to the sales account on April 30 is the amount required to fix the sales price at the three-month forward rate and the balance of the AOCI is reclassified into net income when EDC received payment from the customer. Calculate the following amounts for the financial statements for the year ended June 30, Year 2:

(i) Sales

^{(ii) Exchange gains/losses}

^{(iii) Cash flows for the period}

(c) Explain the similarities and differences between the account balances under the two scenarios above.

Answer 1

Refer to the below images for the above mentioned requirements, in a detailed way of solution.