Bond Corporation manufactures and sells goods for casinos. On July 1, Year 5, MTCarlo contracted to purchase goods from Bond Corp in Europe at a price of E700,000 (E is for Euro). The contract stipulated that the goods be delivered to MTCarlo on October 31, Year 5. Payment is due from MTCarlo on the delivery date. Only July 1, Year 5, MTCarlo arranged a forward contract to purchase E700,000 on October 31, Year 5, at a rate of Euro 1 = $1.51. MTCarlo’s year end is September 30.

As per the contract, the goods were delivered on October 31, Year 5. On that date, MTCarlo purchased E700,000 from the bank and delivered it to Bond.

Exchange rates were as follows:

Spot Rate, Forward Rate

July 1, Y5 E1 = $1.42, E1 = $1.51

September 30, Y5 E1 = $1.49, E1 = $1.53

October 31, Y5 E1 = $1.50, E1 = $1.50

Required:

a. Prepare the journal entries that MTCarlo should make to record the events described in the narrative assuming that the forward contract is designated as a cash flow hedge.

b. Prepare a partial trial balance of the accounts used as at September 30, Year 5. Indicate how each would appear on the company’s financial statements.

c. Prepare the journal entries that MTCarlo should make to record the events described in the narrative assuming that the forward contract is designated as a fair value hedge.

d. Prepare a partial trial balance of the accounts used as at September 30, Year 5. Indicate how each would appear on the company’s financial statements.

Answer rating: 100% (QA)

a MTCarlo should make the following journal entries to record the events described in the narrative ... View the full answer