You are a controller at YY Trading Ltd. YY has increased inventory purchases with Brazilian suppliers in recent years. To protect against exchange rate fluctuations, you decided to arrange a term loan in Brazilian real with your bank. On December 31, 2017, a loan of Real 1,970,000 was arranged with an interest rate of 5.25% per year. Interest is payable at the end of each year. The term loan would mature at the end of 2020. You designated this loan as a cash flow hedge of future inventory purchases.

 

According to your budget, you expected the following inventory purchases (in Brazilian real) in the following years:

2018- 860,000,          

2019- 745,000,                 

2020- 365,000

 

Exchange rates for Brazilian real at the year-end date of the past four years were as following:

2017- 0.40710             

2018- 0.35660                  

2019-0.33710             

2020-0.26250

 

Your company's year-end is on December 31.

 

Required: 

Prepare the journal entries required for 2018, 2019 and 2020 related to this cash flow hedge.

Round your entries to two decimals. All entries must include explanation and supporting calculation to receive marks.

Answer rating: 100% (QA)

Answer Journal Entries will be as follows On 31st December 2017 Bank account is debited with 801987 and Term loan account is credited with 801987 to record the sanction of Loan On 31st December 2018 I... View the full answer