Hamilton Importing Corp. (HIC) imports goods from countries around the world for sale in Canada. On December 1, Year 3, HIC purchased 10,000 watches from a foreign wholesaler for DM600,000 when the spot rate was DM1 =$0.741. The invoice called for payment to be made on April 1, Year 4. On December 3, Year 3, HIC entered into a forward contract with the Royal Bank at the 120-day forward rate of DM1 =$0.781. Hedge accounting is not applied.
The fiscal year-end of HIC is December 31. On this date, the spot rate was DM1 =$0.757 and the 90-day forward rate was DM1 =$0.786. The payment to the foreign supplier was made on April 1, Year 4, when the spot rate was DM1 =$0.802.
Required:
(a) Prepare the journal entries to record
(i) The purchase and the forward contract,
(ii) Any adjustments required on December 31, and
(iii) The payment in Year 4.
(b) Prepare a partial statement of financial position for HIC on December 31, Year 3, that presents the liability to the foreign supplier and the accounts associated with the forward contract.
*(c) Now assume that a discount rate of 6% per annum or 0.5% per month is applied when determining the fair value of the forward contract at December 31, Year 3. Prepare the journal entries to record
(i) The purchase and the forward contract,
(ii) Any adjustments required on December 31, and
(iii) The payment in Year 4.