Dragon Ltd is a New Zealand exporter. The exporter wants to limit the effect of currency fluctuations in the next year, by hedging forecasted USD-denominated sales. It expects to sell US$100,000 of goods on 31 January 2020, and it expects to receive the payment on 30 April 2020. Therefore, on 31 January 2019 it enters into a fifteen month forward contract with the bank to sell US$100,000 and receive the agreed number of NZ dollars on 30 April 2020 (at a forward rate of NZ$1 = US$0.76).

You can assume that the goods of US$100,000 were sold on 31 January 2020 according to the plan. Also assume that this is an effective cash flow hedge and the change in fair value of the forward contract before the forecast sales is 100% effective, under NZ IFRS 9.

Relevant exchange rates (i.e., spot rates and forward rates for 30 April 2020 delivery of cash) for transaction dates and balance dates (31 March) are provided in the table below. The table shows the number of US$ one gets on delivery of NZ$1 (i.e., NZ$1 = US$).

Date	Description	Spot Rate	Forward Rate	Discount factor (6% per annum )
31-Jan-2019	Enter into forward	0.80	0.76	0.9279
31-Mar-2019	Balance date	0.87	0.84	0.9372
31-Jan-2020	Date of sale	0.73	0.71	0.9851
31-Mar-2020	Balance date	0.75	0.74	0.9950
30-Apr-2020	Settlement date	0.77	0.77	1.0000

In accordance with NZ IFRS 9, required:

1. Complete WORKSHEET 1 on page 6 as part of your working, answer the following questions. Show all workings.

1. Prepare the journal entry on 31 January 2019.

2. Prepare the journal entries (if any) on 31 March 2019.

3. Prepare the journal entries (if any) on 31 January 2020.

4. Prepare the journal entries (if any) on 31 March 2020.

5. Prepare the journal entries (if any) on 30 April 2020.

(b) Calculate the overall gain or loss on profit and loss account from both the accounts receivable and forward contract, and provide an overall position check for the net cash receipt. Show all workings.

 

Transcribed Image Text:

Date 31-Jan-19 31-Mar-19 31-Jan-20 31-Mar-20 30-Apr-20 Forward Rate NZ$ Value of Asset Forward Contract Asset and Liability (Contract amount US$100,000) NZ$ Value of Liability Net (A-L) PV Factor Fair Value of Forward Change in Fair Value Date 31-Jan-19 31-Mar-19 31-Jan-20 31-Mar-20 30-Apr-20 Forward Rate NZ$ Value of Asset Forward Contract Asset and Liability (Contract amount US$100,000) NZ$ Value of Liability Net (A-L) PV Factor Fair Value of Forward Change in Fair Value

Answer rating: 100% (QA)

WORKSHEET 1 On 31 January 2019 Dragon Ltd enters into forward contract to sell US100000 and receive ... View the full answer