Merit & Family purchased engines from Canada for 30,000 Canadian dollars on March 10 with payment...

Merit & Family purchased engines from Canada for 30,000 Canadian dollars on March 10 with payment due on June 8. Also, on March 10, Merit acquired a 90-day forward contract to purchase 30,000 Canadian dollars at C$1 = $0.50. The forward contract was acquired to manage Merit & Family’s exposed net liability position in Canadian dollars, but it was not designated as a hedge. The spot rates were


March 10	C$1	=	$	0.49
June 8	C$1	=	$	0.52

Required:
Prepare journal entries for Merit & Family to record the purchase of the engines, entries associated with the forward contract, and entries for the payment of the foreign currency payable. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Record the entry to revalue the foreign currency receivable to the current equivalent U.S. dollar value.
Record the entry to revalue the foreign currency accounts payable to the current U.S. dollar value.
Record the payment of U.S. dollars to an exchange broker for the forward contract.
Record the receipt of Canadian dollars from the exchange broker.
Record the settlement of the foreign currency payable.

Expert Solution

Answer:

Date	Particulars	Debit ($)	Credit ($)
March 10	Inventory (or purchase)	$14,700
	Accounts payable		$14,700
	(Foreign purchase of engines : $14700 = C$30000 x $0.49

	Foreign Currency Receivable from Exchange Broker	$15,000
	Dollars Payable to Exchange Broker		$15,000
	Signed 90-day forward exchange contract to receive = $15,000 = $30000 x $0.50 forward rate

June 8	Foreign currency receivable from broker	$600
	Foreign currency transaction gain		$600
	Revalue foreign currency receivable to current equivalent U.S dollar value: $15,600 = $30000 x $0.52 june 8 spot rate -15,000 = $30000 x $0.50 march 10 forward rate $600 = $30000 x ($0.52 - $0.50)

	Foreign Currency transaction loss	$900
	Accounts payable		$900
	Revalue foreign currency accounts payable to current U.S dollar value: $900 = $30000 x ($0.52 - $0.49)

	Dollars payable to exchange broker	$15,000
	Cash		$15,000
	Pay U.S dolars to exchange broker for forward contract

	Foreign currency units	$15,600
	Foreign currency receivable from
	Exchange broker		$15,600
	Receive canadian dollars from exchange broker: $15,600 = $30000 x $0.52 spot rate

	Accounts payable	$15,600
	Foreign currency units		$15,600
	Settle foreign currency payable

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