Question

On September 7, 20X5, Labrador Limited signed a contract to buy equipment from a US manufacturer. The price of the equipment was US$ 500,000. On the same date, Labrador entered into a forward contract with the bank to buy US$ 400,000 on February 1, 20X6. Labrador designated the forward contract as a hedge of the outstanding purchase commitment on the equipment.
The equipment is to be delivered no later than December 1, 20X5. Labrador made a 20% down payment on September 7, 20X5, and signed a promise to pay the balance on or before February 1, 20X6. The exchange rates are:


The equipment was delivered on schedule. Labrador paid the manufacturer and closed out the forward contract on February 1, 20X6.

Required
1. Assume the hedge was designated as a fair-value hedge. Record the journal entries to record the purchase and the related hedge for 20X5 and 20X6. Labrador’s fiscal year ends on December 31. Ignore amortization of the equipment.
2. Assume the hedge was designated as a cash-flow hedge. Record the journal entries to record the purchase and the related hedge for 20X5 and 20X6. Labrador’s fiscal year ends on December 31. Ignore amortization of theequipment.


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  • CreatedMarch 13, 2015
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