In September 1, 20X1, True North Ltd. a Canadian company, entered into an agreement with Langdon Ltd, a foreign company, to purchase inventory for 100,000 FC. The inventory is to be delivered on February 15, X2. According to the agreement, True North will make payment on March 15, 20X2.

On September 2, 20X1, True North’s bank arranged for a 100,000 FC hedge against True North’s commitment to Langdon. The spot rate on September 2 was 1 FC = $3.60 CDN, and the March 15, 20X2 rate was 1FC = $3.66 CDN.

At True North’s December 31, 20X1 year end, the spot rate was 1FC= $3.63 CDN and the forward rate for march 15, 20X2 was 1FC=$3.65 CDN. With Langdon delivered the merchandise to True North on February 15, 20X2, the spot rate was 1 FC = $3.66 CDN and the forward rate was 1FC=$3.675 CDN. True North paid Langdon on March 15, as required. On that date, the spot rate was 1FC= $ 3.69 CDN.

The hedge arranged by True North is a cash hedge, Prepare the journal entries to record the acquisition of inventory and the related hedge through to Match 15, 20X2, using the gross method.

Answer rating: 100% (QA)

Ineffective Portion of hedge Spot Rate 360 Forward Rate 366 Ineffective portion 006 On 31st Decem... View the full answer