Harley Ltd., a manufacturer of motorcycles located in Burnaby, B.C., successfully negotiated a contract to sell 100 small motorcycles to the police department of Fairbanks, Alaska. The contract price for the cycles was US$10,000 each. The contract was signed on May 12, 2005, with payment to be made by October 1.

Harley then entered into a forward contract to hedge against changes in the U.S. dollar exchange rate.

Delivery of the motorcycles began on June 11 and continued in 20-cycle lots at two-week intervals until the last delivery on August 30, 2005. The buyer then paid the US$1,000,000 contract price when due, and Harley settled with the bank. The exchange rates were as follows:

Required:

a. What amounts relating to the sale and the hedge would appear on Harley’s income statement and balance sheet for the year ended December 31, 2005?

b. Assume end that Harley’s year-end was August 30. What amounts would appear on Harley’s financial statements at August 30, 2005?

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Canadian equivalent of US$1.00: May 12, 2005 June 11-August 30, 2005 October 1, 2005 Spot rate $1.15 1.10 1.12 Forward rate $1.18 1.08 1.14