On August 1, Year 3, Carleton Ltd. ordered machinery from a supplier in Hong Kong for HK$500,000. The machinery was delivered on October 1, Year 3, with terms requiring payment in full by December 31, Year 3. On August 2, Year 3, Carleton entered a forward contract to purchase HK$500,000 on December 31, Year 3, at a rate of $0.165. On December 31, Year 3, Carleton settled the forward contract and paid the supplier.

Exchange rates were as follows:	Spot rates	Forward rates
August 1 and 2, Year 3	HK$1 5 C$0.160	HK$1 5 C$0.165
October 1, Year 3	HK$1 5 C$0.164	HK$1 5 C$0.168
December 31, Year 3	HK$1 5 C$0.169	HK$1 5 C$0.169

Required:

^{(a) Assum e tha t th e forwa r d contrac t wa s designate d a s a cas h flo w hedg e o f the anticipate d transactio n t o pu r chas e th e machiner y an d tha t th e enti r e balanc e in accumulate d othe r comp r ehensiv e incom e o n Octobe r 1 wa s transfer r e d t o the machiner y accoun t whe n th e machiner y wa s delive r ed . Calculat e th e following amount s fo r th e financia l statement s fo r th e yea r ende d Decembe r 31 , Y ea r 3:}

(i) Machinery

^{(ii) Exchange gains/losses}

^{(iii) Cash flows for the period}

(b) Assume that the forward contract was designated as a cash flow hedge of both the purchase of the machinery and the payment of the accounts payable. Of the balance in accumulated other comprehensive income on October 1,

50% was transferred to the machinery account when the machinery was delivered and the other 50% was reclassified into net income when the supplier was paid. Calculate the following amounts for the financial statements for the year ended December 31, Year 3:

(i) Machinery

^{(ii) Exchange gains/losses}

^{(iii) Cash flows for the period}

(c) Assume that Carleton is a private company and uses ASPE for reporting purposes. Calculate the following amounts for the financial statements for the year ended December 31, Year 3:

(i) Machinery

^{(ii) Exchange gains/losses}

^{(iii) Cash flows for the period}

(d) Explain the similarities and differences between the account balances under the three scenarios above. Which scenario would present the higher return on equity for Carleton for Year 3?