Reference no: EM133096377
Question - On October 1, 2018, Aquaman Company purchased inventory from Storm Surge Corporation for euro (€) 200,000, with payment due on February 1, 2019. On October 1, 2018, Storm Surge delivered the inventory to Aquaman from its Toronto warehouse. Aquaman immediately hedged € 170,000 of the payable by buying a forward contract (at no cost) expiring on February 1, 2019. The following exchange rates occurred during the period (the forward rates shown all pertain to forward contracts expiring on February 1, 2019):
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Date
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Spot Rate
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Forward Rate
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October 1, 2018
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€1 = C$1.40
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€1 = C$1.50
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December 31, 2018
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€1 = C$1.48
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€1 = C$1.59
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February 1, 2019
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€1 = C$1.52
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€1 = C$1.52
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Required -
a) Indicate how the hedge entered into by Aquaman on October 1, 2018 should be classified. Support your answer with facts from the question and discuss how effective this hedge would be.
b) Prepare the journal entries or disclosure to be recorded by Aquaman for the accounts payable and the fair value hedge on the following dates:
i) October 1, 2018
ii) December 31, 2018
iii) February 1, 2019
c) Calculate the exchange gain or loss on both the accounts payable and the forward contract to be reported for the year ended December 31, 2019 (January 1 - December 31, 2019).
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