Question

Muskoka Furniture Inc. (Muskoka) can also import custom pine furniture but it must be ordered several months in advance as it is only manufactured after a specific request is made. Assume that on September 1, 20X4, Muskoka orders custom bedroom furniture from a supplier in the United States for US$ 2,000. The invoice called for payment to be made on February 28, 20X5. On September 1, 20X4, Muskoka entered into a forward contract with a bank to hedge the commitment by agreeing to buy US$ 2,000 on February 28, 20X5, at a rate of US$ 1 C$ 1.13. Muskoka takes delivery of the furniture on November 1, 20X4 when the February 28, 20X5 forward rate is US$ 1 C$ 1.15. Muskoka’s year-end is December 31. On February 28, 20X5, Muskoka settled the forward contract with the bank and the US supplier was paid.
Spot rates were as follows:
September 1, 20X4...................... US$ 1 = C$ 1.11
November 1, 20X4...................... US$ 1 = C$ 1.14
December 31, 20X4....................... US$ 1 = C$ 1.16
February 28, 20X5...................... US$ 1 = C$ 1.19
The February 28, 20X5, forward rate on December 31, 20X4, was US$ 1 C$ 1.165.

Required
1. Prepare journal entries to record all of the transactions for 20X4 and 20X5, including any adjustments required on December 31, 20X4, assuming that Muskoka does not use hedge accounting. Show your supporting calculations.
2. Assume that Muskoka Furniture Inc. designates the hedge as a fair-value hedge of a commitment, documents the relationship, and assesses the hedge as effective. Prepare journal entries to record all of the transactions for 20X4 and 20X5, including any adjustments required on December 31, 20X4, assuming that Muskoka can use hedge accounting.
3. Assume that Muskoka Furniture Inc. designates the hedge as a cash-flow hedge of a commitment, documents the relationship and assesses the hedge as effective. Prepare journal entries to record all of the transactions for 20X4 and 20X5, including any adjustments required on December 31, 20X4.



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  • CreatedMarch 13, 2015
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