Calculate gain on the forward contract for significant date

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Reference no: EM132711082

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

1April 2020

0.67

0.65

1 May 2020

0.61

0.59

30th June 2020

0.55

0.57

31 July 2020

0.64

0.64


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

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

 

Reference no: EM132711082

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