Question

On August 1, Year 3, Carleton Ltd. ordered machinery from a supplier in Hong Kong for HK$500,000. The machinery was delivered on October 1, Year 3, with terms requiring payment in full by December 31, Year 3. On August 2, Year 3, Carleton entered a forward contract to purchase HK$500,000 on December 31, Year 3, at a rate of $0.165. On December 31, Year 3, Carleton settled the forward contract and paid the supplier.
Exchange rates were as follows:
Required:
(a) Assume that the forward contract was designated as a cash flow hedge of the anticipated transaction to purchase the machinery and that the entire balance in accumulated other comprehensive income on October 1 was transferred to the machinery account when the machinery was delivered. Calculate the following amounts for the financial statements for the year ended December 31, Year 3:
(i) Machinery
(ii) Exchange gains/losses
(iii) Cash flows for the period
(b) Assume that the forward contract was designated as a cash flow hedge of both the purchase of the machinery and the payment of the accounts payable.
Of the balance in accumulated other comprehensive income on October 1, 50% was transferred to the machinery account when the machinery was delivered and the other 50% was reclassified into net income when the supplier was paid. Calculate the following amounts for the financial statements for the year ended December 31, Year 3:
(i) Machinery
(ii) Exchange gains/losses
(iii) Cash flows for the period
(c) Assume that Carleton is a private company and uses ASPE for reporting purposes. Calculate the following amounts for the financial statements for the year ended December 31, Year 3:
(i) Machinery
(ii) Exchange gains/losses
(iii) Cash flows for the period
(d) Explain the similarities and differences between the account balances under the three scenarios above. Which scenario would present the higher return on equity for Carleton for Year 3?


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  • CreatedJune 09, 2015
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