You are the Financial advisor to various clients and they have asked for your advice relating to the following accounting issues:

Issue (a) Hedge accounting

Namsafe (Pty) Ltd with a 31 December year end has a NAD functional currency and occasionally imports machinery from the United Stated of America in US Dollars (USD). They always take out forward cover to minimize their foreign exchange exposure.

Namsafe (Pty) Ltd placed a non-cancellable order on 31 October 201 with a foreign supplier for a new machine to be used in production for $200 000. Namsafe (Pty) Ltd took out a three month FEC on order date. The machine was loaded free on board on 10 January 2020. The goods were delivered to Namsafe (Pty) Ltd’s premises on 20 January 2020. The supplier was paid on 31 January 2020.

Assume that all the hedging criteria has been met including hedge effectiveness.

Namsafe (Pty) Ltd’s accounting policy is to treat hedges of a firm commitment as cash flow hedges. It is Namsafe’s accounting policy to offset cumulative gains or losses (recognised in equity via other comprehensive income) on the transaction date against the cost of the acquired asset (basis adjustment).

The relevant exchange rates are as follows:

Date	Spot rate	Forward rate
31 October 2019	$1 = NAD 7.22	$1 = NAD 7.25
31 December 2019	$1 = NAD 7.30	$1 = NAD 7.34
10 January 2020	$1 = NAD 7.44	$1 = NAD 7.46
20 January 2020	$1 = NAD 7.47	$1 = NAD 7.48
31 January 2020	$1 = RNAD7.49	Not applicable

REQUIRED:		Marks
(a)	Compile the journal entries for the above mentioned transaction for the 2019 and 2020 financial year. Ignore tax and depreciation. Narrations are required. Show calculations.	18
Total marks		18

Answer rating: 100% (QA)

2019 Dr Machinery 200000 Cr Accounts Payable 200000 Dr Accounts Payable 200000 Cr Bank 200000 ... View the full answer