Reference no: EM133099844
Question - On October 1, 2021, Garfield Ltd. ordered lasagna production machinery from a supplier in Italy for €500,000. The machinery was delivered on November 30, 2021, with terms requiring payment in full by January 31, 2022. On October 2, 2021, Garfield Ltd. entered into a forward contract with its bank to purchase €500,000 euros on January 31, 2022, at a rate of $0.225. On January 31, 2022, Garfield Ltd. settled the forward contract and paid the supplier.
Exchange Rates were:
Spot Rates Forward Rates
October 1, 2021 € 1.00 = $ 0.210 € 1.00 = $ 0.221
October 2, 2021 € 1.00 = $ 0.215 € 1.00 = $ 0.225
November 30, 2021 € 1.00 = $ 0.221 € 1.00 = $ 0.230
December 31, 2021 € 1.00 = $ 0.235 € 1.00 = $ 0.243
January 31, 2022 € 1.00 = $ 0.250 € 1.00 = $ 0.250
Additional facts: € = Euros. $ = Canadian.
Garfield's functional currency is Canadian and operates in Canada. Garfield Inc. follows IFRS.
A) Prepare all required journal entries assuming that the forward contract was designated as a cash flow hedge.
B) Prepare all required journal entries assuming the forward contract was designated as a fair value hedge.
C) Prepare all required journal entries assuming no forward contract was entered.
D) What is the balance in the Forward Contract account under all three options above at the reporting date and at the settlement date?
E) If you had a choice, which of the three options above would you choose for this transaction and briefly explain why? (Maximum: 4 sentences)