In: Accounting
Compucat is a Canadian manufacturing company that produces
inexpensive personal and laptop computers. The company has been
generating progressively more of its sales from foreign markets.
During 2016, the company started purchasing most of its components
from a supplier in Germany.
To deal with the uncertainty associated with foreign exchange
fluctuations, all of Compucat's foreign currency denominated
receivables and payables are hedged with contracts with the
company's bank. Compucat's year-end is on December 31. The
following transactions took place in 2016:
On September 1, 2016, Compucat purchased components from its German
supplier for 100,000 Euros. On that date Compucat entered into a
forward contract for 100,000 Euros at the 60 day forward rate of 1
Euro = CDN$1.50. The forward contract was designated as a fair
value hedge of the amount payable to the German supplier. Compucat
settled with the bank and paid its supplier in full on December 1,
2016.
On December 1, 2016 Compucat also shipped a batch of laptop
computers to an American client for US$250,000. The invoice
required that Compucat receive its payment in full by January 31,
2017. On the date of the sale, the company entered into a forward
contract for US$250,000 at the two-month forward rate of US$1 =
CDN$1.25. This forward contract was designated to be a fair value
hedge of the amount due from the American customer.
The dates and exchange rates relevant to these transactions are
shown below:
Spot rate |
Forward rate |
|
September 1, 2016: |
1 Euro = CDN$1.4875 |
1 Euro = CDN$1.5000 |
December 1, 2016: |
1 Euro = CDN$1.4800 |
1 Euro = CDN$1.4800 |
US$1 = CDN$1.2600 |
US$1 = CDN$1.2500 |
|
December 31, 2016: |
US$1 = CDN$1.2700 |
US$1 = CDN$1.2600 |
January 31, 2017 |
US$1 = CDN $1.275 |
US$1 = CDN $1.275 |
1) Prepare the 2017 Journal Entries if the company invoked fair value hedge accounting
2) What would the balance in the asset and liability accounts as at December 31, 2016?
1) Prepare the 2017 Journal Entries if the company invoked fair value hedge accounting.
Answer: Journal Entries
September 1, 2016: Debit Amount Credit Amount
Inventory a/c...........................dr. CDN$148,750
To Accounts Payable ac CDN$148,750
(Being Inventory purchased for Euros 100,000 * CDN $1.4875 on account )
Forward Contract a/c..............dr CDN$150,000
To Payable to Bank a/c CDN$150,000
(Being entered into a forward contract on the same day for fwd exchange rate of CDN$1.50 )
December 1, 2016:
Accounts Receivable a/c.........dr CDN$315,000
To Sales a/c CDN $315,000
(Being sale of inventory to US worth USD$ 25000 converted to CDN $ @ 1.26)
Receivable from Bank a/c.......dr $312,500
To forward contract a/c $312,500
(Being hedged the position by entering into a forward contract @1.25 )
Accounts Payable a/c.............dr $750
To Gain in Exchange a/c $750
(Being gain in the exchange recorded for payment made 148,000 instead of 148,750 )
Loss in Exchange a/c.............dr $2,000
To Forward contract a/c $2,000
(Being loss in exchange recorded from contract received 148000 instead of 150000 )
Payable to Bank a/c...............dr $150,000
To Cash a/c $150,000
(Being settlement done with bank, paid amount in full )
Cash a/c......................dr $148,000
To Forward Contract a/c $148,000
(Being forward contract settled for cash )
December 31, 2016:
Accounts Receivable a/c.........dr $2,500
To Gain in Exchange a/c $2,500
(Being gain in exchange recorded for receivables )
Loss in Exchange a/c..............dr $2,500
To Forward Contract a/c $2,500
(Being loss in forward contrat recorded )
January
2) What would the balance in the asset and liability accounts as at December 31, 2016?
Balance in the asset and liability accounts as at December 31, 2016:
Compucat Inc.
Asset and Liability Account as at 31st December, 2016
Assets: Amount
Accounts Receivable $317,500
Liabilities:
Forward Contract $1250
(Receivables from Bank: $250,000@ $1.25 = $312,500)
(Less: Forward Contract $250,000 @ $1.26 = $315,000)
Deferred foreign exchang Credit $2,500