Reference no: EM132930810

Question - Manitoulin Equipment Inc. Manitoulin Equipment Inc. (Manitoulin) imports custom equipment, but such equipment must be ordered several months in advance as it is only manufactured after a specific request is made. Assume that on November 1, 20X4, Manitoulin orders custom equipment from a supplier in the United States for US$250,000.

The invoice called for delivery and payment to be made on February 28, 20X5. On November 1, 20X4, Manitoulin entered into a forward contract with a bank to hedge the commitment by agreeing to buy US$250,000 on February 28, 20X5, at a rate of US$1 = C$1.180. Manitoulin's year-end is December 31. On February 28, 20X5, Manitoulin received the Equipment, settled the forward contract with the bank, and paid the US supplier.

Spot rates were as follows:

November 1, 20X4 US$1 = C$1.170

December 31, 20X4 US$1 = C$1.190

February 28, 20X5 US$1 = C$1.210

The February 28, 20X5, forward rate on December 31, 20X4, was US$1 = C$1.195.

Complete the following for homework:

1. Prepare journal entries to record all of the transactions for 20X4 and 20X5, including any adjustments required on December 31, 20X4, assuming that Manitoulin does not use hedge accounting. Show your supporting calculations.

2. Assume that Manitoulin Equipment Inc. designates the hedge as a fair-value hedge of a commitment, documents the relationship, and assesses the hedge as effective. Prepare journal entries to record all of the transactions for 20X4 and 20X5, including any adjustments required on December 31, 20X4, assuming that Manitoulin can use hedge accounting.

3. Assume that Manitoulin Equipment Inc. designates the hedge as a cash-flow hedge of a commitment, documents the relationship and assesses the hedge as effective. Prepare journal entries to record all of the transactions for 20X4 and 20X5, including any adjustments required on December 31, 20X4.