On August 1, 20X4, True North Ltd., a Canadian company, entered into an agreement with Langdon Ltd, a foreign company, to purchase inventory for 400,000FC. The inventory is to delivered on January 31, 20X3. In will make payment on February 14, 20X5.

On August 1, 20X4, True North's bank arranged for a 400,000FC hedge against True North's commitment to Langdon. The spot rate on

August 1 was 1FC = $2.

50 CDN and the February 14, 20X5 forward rate was 1FC = $2.542 CDN.

At True North's December 31, 20X4 year-end, the spot rate was 1FC - $2.52 CDN and the forward rate to February 14, 20X5 was 1FC $2.55 CDN. When Langdon delivered the merchandise to True North on January 31, 20X5, the spot rate was 1FC - $2.54 CDN and the forward rate was

42 56 CDN. True North paid Langdon

on February 14, as required. On that date, the spot rate was 1FC = $2.565

CDN

Required:

The hedge arranged by True North is a cash hedge. Prepare the journal entries to record the acquisition of the inventory and the related hedge through to February 14, 20X5, using the gross method.

Answer rating: 100% (QA)

August 1 20X4 Dr Cash 400000 Cr Hedge Foreign Exchange 400000 December 31 20X4 Dr Hedge Foreign Exch... View the full answer