On September 1, 2021, Sennobus Company ordered equipment, terms f.o.b. destination from Crescendo Corporation (Crescendo) for 3,500,000.

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Question:

On September 1, 2021, Sennobus Company ordered equipment, terms f.o.b. destination from Crescendo Corporation (Crescendo) for €3,500,000. The equipment was to be delivered on December 1, 2021, with payment due on February 1, 2022. Also on September 1, 2021, Sennobus Company entered into a forward contract with a bank expiring on February 1, 2022, to hedge its foreign currency exposure. On December 1, 2021, Crescendo delivered the equipment to Sennobus from its Toronto warehouse. Sennobus depreciates its equipment using a 20% declining balance rate. The following exchange rates occurred during the period (the forward rates shown all pertain to forward contracts expiring on February 1, 2022):

Spot Rate Forward Rate

September 1, 2021 €1= C$1.494 €1 = C$1.526

December 1, 2021 €1= C$1.452 €1 = C$1.498

December 31, 2021 €1= C$1.445 €1 = C$1.468

February 1, 2022 €1= C$1.434

a) Identify the hedged item and the hedging item.

b) Assuming that Sennobus chose not to apply hedge accounting, calculate the following amounts relating to the equipment purchase and the forward contract:

i. Net cash received or paid

ii. Net foreign exchange gain or loss reported for the year ended December 31, 2021

c) Prepare the journal entries, including any adjusting entries for the equipment, to be recorded by Sennobus assuming that Sennobus Company applies hedge accounting and has designated the forward contract as a cash flow hedge

i. September 1, 2021

ii. December 1, 2021

iii. December 31, 2021 – Sennobus’s year-end

iv. February 1, 2022

d) Prepare financial statement extracts for Sennobus showing how the information relating to the forward contract will be reported assuming that Sennobus Company applies hedge accounting and has designated the forward contract as a fair value hedge

e) Clearly, the exchange rate moved in favor of the Canadian dollar. Does this mean Sennobus made a wrong call to hedge its equipment purchase? Explain.