Lamont Company is a Canadian company that produces electronic switches for the telecommunications
industry. Lamont regularly imports component parts from Sousa Ltd., a supplier
located in Mexico, and makes payments in Mexican pesos (MP). Based on past experience, Lamont Company expects to purchase raw materials from Sousa at a cost of MP 10,000,000 on March 1, Year 2. To hedge this forecasted transaction, Lamont enters into a three-month forward contract on October 31, Year 1 to purchase 10 million pesos on March 1, Year 2. It appropriately designates the forward contract as a cash flow hedge of the Mexican peso liability exposure.  On March 1, Year 2, the forward contract is settled with the bank and Sousa is paid for delivering the goods to Lamont.

The following spot and forward exchange rates exist during the period October to March:

Required:

(a) Prepare all journal entries required to record the transactions described above.

(b) Prepare a December 31, Year 1, partial trial balance of the accounts used in part (a), and indicate how each account would appear in the year-end financial statements.

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Forward Rates Spot Rates $0.072 October 31, Year 1 December 31, Year 1 March 1, Year 2 *For contracts expiring on March MP1 = $0.075 MP1 = $0.076 MP1 MP1 = $0.074 MP1 = $0.078 $0.078 MP1 = 1, Year 2.