Foreign currency embedded derivatives Company A, an Indian company whose functional currency is rs enters into a
Question:
Foreign currency embedded derivatives Company A, an Indian company whose functional currency is rs enters into a contract to purchase machinery from an unrelated local supplier, company B. The functional currency of company B is also rs. However, the contract is denominated in USD, since the machinery is sourced by company B from a US based supplier. Payment is due to company B on delivery of the machinery.
Key terms of the contract:
Contractual features Details Contract/order date 9 September 20X1 Delivery/payment date 31 December 20X1 Purchase price USD 1,000,000 USD/` Forward rate on 9 September 20X1 for 31 December 20X1 maturity 67.8 USD/` Spot rate on 9 September 20X1 66.4 USD/` Forward rates for 31 December, on: 30 September 31 December (spot rate) 67.5 67.0
Company A is required to analyse if the contract for purchase of machinery (a capital asset) from company B contains an embedded derivative and whether this should be separately accounted for on the basis of the guidance in Ind AS 109.
Also give necessary journal entries
Advanced Financial Accounting
ISBN: 978-0078025624
10th edition
Authors: Theodore E. Christensen, David M. Cottrell, Richard E. Baker