$453$ Assignment $4$

Total marks $21$

Note: Must show all work for full marks

Question $1(21$ marks$)$

On November $30$ Year $3,$ Sun Inc., a Canadian company, arranged with Caribbean supplier to purchase inventory at a cost of FC$400,000.$ The inventory is scheduled to be delivered on January $10,$ Year $4$ with payment February $10,$ Year $4.$ On December $10,$ Year $3,$ Sun Inc. entered into a forward purchase contract with its bank to acquire FC$400,000$ on February $10,$ Year $4.$ Year end is December $31$

Relevant exchange rates for $1$ FCU are as follows:

$\backslash$table$[[,,$Spot rates,Forward rates$],[$November $30,$Yr $3,0\mathrm{.}960,0\mathrm{.}956],[$December $10,$Yr $3,0\mathrm{.}958,0\mathrm{.}944],[$December $31,$Yr $3,0\mathrm{.}944,0\mathrm{.}940],[$January $10,$Yr $4,0\mathrm{.}934,0\mathrm{.}941],[$February $10,$Yr $4,0\mathrm{.}943,]]$

Required:

$($a$)$ Assume Sun Inc. elects to account for the forward contract as a cash flow hedge, prepare the memorandum and journal entries for Year $3$ and Year $4.$ Assume apply hedge accounting. Show supporting calculations. $(10$ marks$)$

$($b$)$ Prepare a partial Comprehensive Income Statement and Balance Sheet for December $31,$ Year $3$ to indicate how each account would appear. $(3$ marks$)$

$($c$)$ Calculate the discount or premium $($state which one$)$ and explain $($along with allocation of dollar values$)$ how the net gain or loss $($state which one$)$ is allocated. $(4$ marks$)$

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