Question
In: Accounting
On 1 No 2016, Burwood Limited based in Australia ordered inventories to the value of US...
On 1 No 2016, Burwood Limited based in Australia ordered inventories to the value of US $ 3000000 on FOB destination terms. The goods are shipped on 1 April 2017 and are paid for on 30 June 2017. Burwood Limited also entered into a forward exchange contract of US $ 3000000 on 1 Nov 2016 with NYC Bank in which NYC Bank agrees to supply Burwood Limited with US $ 3000000 on 30 June 2017. Burwood Limited has a FY ending on 31 Dec.
Additional information on exchange rates
| Date | Spot Rate | Forward Rate |
| 1.11.2016 | A$1 = US $ 0.89 | A$1 = US $0.84 |
| 31.12.2016 | A$1 = US $0.86 | A$1 = US $0.82 |
| 1.04.2017 | A$1 = US $0.85 | A$1 = US $0.79 |
| 30.06.2017 | A$1 = US $ 0.80 | A$1 = US $ 0.80 |
Management adopts cashflow hedge accounting.
Required:
Prepare a table showing gain/losses on the hedging instrument (the forward rate contract ) and also provide necessary journal entries to record the above transactions from 1.11.2016 to 30.06.2017
Solutions
Expert Solution
| Details are as under | |||
| Date | Spot Rate | Forward Rate | |
| 1.11.2016 | A$1 = US $ 0.89 | A$1 = US $0.84 | |
| 31.12.2016 | A$1 = US $0.86 | A$1 = US $0.82 | |
| 1.04.2017 | A$1 = US $0.85 | A$1 = US $0.79 | |
| 30.06.2017 | A$1 = US $ 0.80 | A$1 = US $ 0.80 | |
| Calculation for Gains or Losses from Forward Contract | |||
| Fair Value of Forward Contract | Change in Fair Value of Forward Contract Gain or (Loss) | ||
| 1.11.2016 | NA | NA | |
| 31.12.2016 | 0.82-0.84 x 3000000 | - 60,000.00 | - 60,000.00 |
| 1.04.2017 | 0.79-0.84 x 3000000 | - 150,000.00 | - 90,000.00 |
| 30.06.2017 | 0.80-0.84 x 3000000 | - 120,000.00 | 30,000.00 |
| Net Gain (Loss) | - 120,000.00 | ||
| Accounting Entries | 31.12.2016 | Debit | Credit | |
| Foreign Exchange Gains or Losses | 60,000.00 | |||
| Forward Contract Payable | 60,000.00 | |||
| Being recognition of the change in fair value of forward exchange contract on 31.12.16 | ||||
| Firm Commitment | 60,000.00 | |||
| Foreign Exchange Gains or Losses | 60,000.00 | |||
| Being recognition of the change in fair value of firm commitment that is due to change in exchange rate | ||||
| Accounting Entries | 1.04.2017 | Debit | Credit | |
| Foreign Exchange Gains or Losses | 90,000.00 | |||
| Forward Contract Payable | 90,000.00 | |||
| Being recognition of the change in fair value of forward exchange contract on 1.04.17 | ||||
| Firm Commitment | 90,000.00 | |||
| Foreign Exchange Gains or Losses | 90,000.00 | |||
| Being recognition of the change in fair value of firm commitment that is due to change in exchange rate | ||||
| Goods A/c | 3,120,000.00 | |||
| Firm Committment | 120,000.00 | |||
| Account Payable | 3,000,000.00 | |||
| Being receipt of goods accounted for. | ||||
| Accounting Entries | 30.06.2017 | Debit | Credit | |
| Forward Contract Payable | 30,000.00 | |||
| Foreign Exchange Gains or Losses | 30,000.00 | |||
| Being recognition of the change in fair value of forward exchange contract on 30.06.17 | ||||
| Foreign Exchange Gains or Losses | 30,000.00 | |||
| Firm Commitment | 30,000.00 | |||
| Being recognition of the change in fair value of firm commitment that is due to change in exchange rate | ||||
| Account Payable | 3,000,000.00 | |||
| Forward Contract Payable | 120,000.00 | |||
| Cash | 3,120,000.00 | |||
| Being payment/settlement made for goods supplied | ||||
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