On December 10, Year 3, a Canadian company, Chuk Inc., arranged to purchase inventory from a supplier in Germany for €500,000. Payment is due one month after delivery of the merchandise which is scheduled to be delivered on February 10, Year 4. On December 15, Year 3, Chuk Inc. entered into a forward purchase contract with RBC to exchange €500,000 on March 10, Year 4.
Year end is December 31

Relevant exchange rates are as follows for 1€:

                                        Spot rates $        Forward rates $
December10 Yr 3              1.500                       1.520
December15 Yr 3               1.530                      1.560
December31 Yr 3                1.540                      1.570
February10 Yr 4                  1.525                     1.552
March10 Yr4                         -                           1.539

Required: Must show all work.

  (a) Assume Chuk Inc. elects to account for the forward contract as a cash flow hedge, prepare the memorandums and journal entries for Year 3 and Year 4. Show supporting calculations.

(b) Prepare a partial Comprehensive Income Statement and Balance Sheet for December 31, Year 3 to indicate how each account would appear on the company’s financial statements (show headings). (3 marks)

c) Assume Chuk Inc. elects not to use hedge accounting in accounting for the forward contract, prepare only the journal entries that would be different from part (a). Also explain the impact on the allocation of the premium/discount. (4 marks)

Answer rating: 100% (QA)

a Accounting for the Forward Contract as a Cash Flow Hedge Memorandums 1 December 10 Year 3 Chuk Inc arranges to purchase inventory from a German supp... View the full answer