Our firm purchased equipment for US$100,000 on Dec 1, 2015. Our year end is December 31,...

Our firm purchased equipment for US$100,000 on Dec 1, 2015. Our year end is December 31, and the payable is due on Jan 31, 2016. On December 1, 2015, we entered into a forward exchange contract with the bank to provide us with the US dollars on January 31, 2016.

The following rates were in effect:

Forward Rates:

Dec1,2015; 60 day forward rate US$1= CDN$1.152

Dec 31, 2015; 30 day forward rate US$1 = CDN$ 1.162

Spot rates

Dec 1, 2015 US$1 = CDN$ 1.130

Dec 31, 2015 US$1 = CDN$ 1.16

Jan 31, 2016 US$1 = CDN$ 1.210

Prepare all the journal entries arising from this transaction, from original sale to final settlement.

Expert Solution

Date	Particulars	Debit	Credit

01-Dec-15	Equipment	88500
	Accounts payable		88500

01-Dec-15	Foreign currency receivable from exchange dealer	86810
	Dollars payable to exchange dealer		86810


31-Dec-15	Accounts payable	2290
	Transaction gain		2290

31-Dec-15	Transaction loss	750
	Foreign currency receivable from exchange dealer		750

31-Jan-16	Accounts payable	3570
	Transaction gain		3570

	Transaction loss	3420
	Foreign currency receivable from exchange dealer		3420

	Accounts payable	82640
	Foreign currency receivable from exchange dealer		82640

For the accounts payable we use the spot rate and compare the previous spot rate to the curent spot rate to determine the gain or loss at that point of time.

For the foreign currency receivable we use the forward rate and compare the current forward rate to the previous one to determine the gain or loss on that contract at that point of time

Please like the solution if satisfied and drop a comment in case of any doubt.

Thankyou

ekkarill92 answered 2 years ago

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