On January 15, 20X3, True North Ltd., a Canadian company, entered into an agreement with Langdon...
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On January 15, 20X3, True North Ltd., a Canadian company, entered into an agreement with Langdon Ltd, a foreign company, to purchase inventory for 300,000FC. The inventory is to be delivered on May 5, 20X3. In accordance with the agreement, True North will make payment on May 31, 20X3. On January 15, 20X3, True North's bank arranged for a 300,000FC hedge against True North's commitment to Langdon. The spot rate on January 15 was 1FC = $1.40 CDN and the May 31, 20X3 forward rate was 1FC = $1.442 CDN. At True North's March 31, 20X3 year-end, the spot rate was 1FC = $1.42 CDN and the forward rate to May 31, 20X3 was 1FC = $1.45 CDN. When Langdon delivered the merchandise to True North on May 5, 20X3, the spot rate was 1FC = $1.44 CDN and the forward rate was 1FC = $1.46 CDN. True North paid Langdon on May 31, as required. On that date, the spot rate was 1FC = $1.47 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 May 31, 20X3 using the gross method. On January 15, 20X3, True North Ltd., a Canadian company, entered into an agreement with Langdon Ltd, a foreign company, to purchase inventory for 300,000FC. The inventory is to be delivered on May 5, 20X3. In accordance with the agreement, True North will make payment on May 31, 20X3. On January 15, 20X3, True North's bank arranged for a 300,000FC hedge against True North's commitment to Langdon. The spot rate on January 15 was 1FC = $1.40 CDN and the May 31, 20X3 forward rate was 1FC = $1.442 CDN. At True North's March 31, 20X3 year-end, the spot rate was 1FC = $1.42 CDN and the forward rate to May 31, 20X3 was 1FC = $1.45 CDN. When Langdon delivered the merchandise to True North on May 5, 20X3, the spot rate was 1FC = $1.44 CDN and the forward rate was 1FC = $1.46 CDN. True North paid Langdon on May 31, as required. On that date, the spot rate was 1FC = $1.47 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 May 31, 20X3 using the gross method.
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Related Book For
Intermediate Accounting Reporting and Analysis
ISBN: 978-1285453828
2nd edition
Authors: James M. Wahlen, Jefferson P. Jones, Donald Pagach
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