XYZ Medical Ltd a Melbourne based company enters into a non-cancellable purchase commitment of US$50,000 with an American supplier on 1 April 2020 to buy the face masks in a bulk for medical staff. These face masks are to be shipped on the 1st of May 2020. The amount owing on the purchase is payable on 31 July 2020. XYZ Ltd observed that exchange rate is very volatile due to the current trade war between America and China. XYZ decided to enter into a forward rate contract. On 1 April 2020 a forward-exchange contract for US$50,000 as taken out with Westpac Bank Ltd at a cost of $76 923 (which is US$50,000 ÷ 0.65 with AU$1.00 = US$0.65 being the agreed forward rate). XYZ Ltd uses cash flow hedge accounting and its reporting date is 30 June.

Date	Spot rate	Forward rate
1st April 2020	0.67	0.65
1st May 2020	0.61	0.59
30th June 2020	0.55	0.57
31st July 2020	0.64	0.64

Required:

1. Calculate the gain or loss on the forward contract for each significant date.

2. Prepare the journal entries to account for the transactions including 31/7/2020.

Part B

On 10 July 2019, La Arabia Ltd an Australian based company provides some management consulting service to a company in Unites States of America called XYZ Incorporation for an agreed fee of US$1 million. The amount is paid into the US bank account of La Arabia Ltd on 10 July 2019. La Arabia Ltd elects to leave the amount in the US bank account, which pays interest each year on 30 June at a rate of 10 per cent. The relevant exchange rates are:

10 July 2019	A$1.00 = US$0.78
30 June 2020	A$1.00 = US$0.75

Required:

Provide the journal entries that would need to be made in the books of La Arabia Ltd to account for the above transaction for the year ending 30 June 2020.

Answer rating: 100% (QA)

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