Using the information in P8—5, assume that on December 1, 2005, PL entered into a forward contract to buy US$10,000 on January 1, 2006 — the expected date of payment to the equipment manufacturer. The forward contract is designated as a hedge of the remaining amount due. The forward contract rate on December 1, 2005, was C$1 = US$0.6750.

Required:

Give the journal entries to record all aspects of the purchase and the hedge for 2005 and 2006.

Data from Problem P8-5

PL Corporation has a December 31, 2005, year-end. The company submitted a purchase order for US$30,000 of equipment on July 1, 2005, when the exchange rate was C$1.00 = US$0.6500. It received the equipment on September 30, 2005, when the exchange rate was C$1.00 = US$0.6667. The company paid US$20,000 to the supplier on December 1, 2005, when the exchange rate was US$0.6900. On December 31, 2005, the exchange rate was US$0.7000. The company uses straight-line amortization commencing in the month following the acquisition. The equipment is expected to last five years.