Foreign exchange risk component

Assignment Help Financial Accounting

Reference no: EM133492640

Green & Gold Limited

Green & Gold Limited is a South African manufacturing company with the local currency (rand) as it's functional and presentation currency.

The following information is available for the years ended 31 December 2019 and 31 December 2020:

Import of manufacturing machine

The board of directors of Green & Gold Limited decided to purchase a new manufacturing machine from a supplier in the USA. On 1 May 2019, the company placed a non - cancellable order for the machine at a total value of $180 000. The machine was shipped (cost, insurance, freight) (CIF) from New York on 1 July 2019 and was delivered to the premises of Green & Gold Limited on 1 September 2019. The machine was available for use as intended by management on 1 September 2019.

On 1 May 2019 the company took out a forward exchange contract (FEC) for $180 000 which was set to expire on 1 August 2019, in order to hedge the import of the machine. On 1 May 2019 the company designated the forward exchange contract as the hedging instrument and the foreign exchange risk component of the firm commitment and foreign exchange creditor which arise as a result of the transaction, as the hedged items.

On 1 August 2019 the company renewed the FEC for another six months. The renewal of the FEC forms part of the company's documented hedging strategy.

The creditor was paid on 1 February 2020.

Additional information:

1. The company has chosen to apply hedge accounting and you can assume that all the hedging criteria in terms of IFRS 9, Financial Instruments, have been met.

2. The company accounts for all hedges in respect of the foreign exchange risk component of the firm commitment and the foreign exchange creditor as a fair value hedge.

3. The following rand/dollar exchange rates are applicable:

Date	Spot rate	Forward rate
Date	$1 = R	$1 = R
1 May 2019	7,50	7,53 (3 months)
1 July 2019	7,65	7,68 (1 month)
1 August 2019	7,70	7,73 (6 months)
1 September 2019	7,75	7,78 (5 months)
31 December 2019	7,40	7,45 (1 month)
1 February 2020	7,30

4. The financial year-end of Green & Gold Limited is 31 December.

5. The machine has a 5-year useful life and depreciated using the straight-line method.

6. Ignore any tax implications.

Prepare the general journal entries (cash transactions included), relating to the above transactions of Green & Gold Limited for the two years ended 31 December 2019 and 31 December 2020. Your answer should comply with International Financial Reporting Standards (IFRS).

Note to Student:

Journal narrations not necessary.
Specify dates.
Show all calculations.

Reference no: EM133492640

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