LO$1,5$

Hedging an Existing Monetary Position

On November $15,$ Year $1,$ Domco Ltd$.$ of Montreal bought merchandise from a supplier located in Brunei for $100,000$ Brunei dollars $($BND$/$B$$).$ The Brunei dollar was trading at $$0\mathrm{.}81$ on that date, and the terms of the purchase required Domco to pay the account on January $30.$ Year $2.$ On December $1,$ when the spot rate was $$1=$$$0\mathrm{.}813,$ Domco entered into a forward contract with its bank to receive $B$$$100,000$ at the $60-$day forward rate of $B$$$1=$$$0\mathrm{.}82.$ On December $31,$ Year $1,$ Domco's year$-$end, the spot rate was B$I $=$ $$0\mathrm{.}825$ and the $30-$day forward rate was $B$$$1=$$$0\mathrm{.}831.$ On January $30,$ Year $2,$ when the spot rate was $B$$$1=$$$0\mathrm{.}839,$ Domco settled the forward contract with its bank and paid B $$100,000$ to the Brunei supplier.

Required

$($a$)$ Prepare the journal entries required in Year $1$ and Year $2,$ assuming that hedge accounting is not applied.

$($b$)$ Prepare a partial statement of financial position as at December $31,$ Year $1,$ which shows accounts payable and the forward contract.

$($c$)$ Prepare one journal entry to summarize the combined effect of all entries in part $($a$).$

$($d$)$ Prepare the journal entries required in Year $1$ and Year $2,$ assuming that the forward contract is designated as a fair value hedge and is segregated between the spot element and forward element.

$($e$)$ Prepare one journal entry to summarize the combined effect of all entries in part $($d$).$

$($f$)$ Explain the similarities and differences between the two methods of accounting for the forward contract.