Prepare the journal entries for fountain cosmetics ltd

Reference no: EM132970598

Question: Fountain Cosmetics Ltd, an Australian company that uses the Australian dollar (AUD) as its functional currency, imports and sells cosmetic and beauty products. Purchases made from foreign suppliers are denominated in foreign currency (FC).

An order for FC 75,000 of cosmetics was placed with a foreign supplier in April 2020 and the inventory was shipped, FOB shipping point, on 15 May 2020. The amount was payable to the foreign supplier on 20 July 2020.

Concerned about possible adverse exchange rate changes, Fountain Cosmetics Ltd entered into a forward exchange contract with the Eastpac Bank on 15 May 2020. The terms of the contract were that on 20 July 2020, Fountain Cosmetics Ltd would deliver AUD to the Eastpac Bank in exchange for FC 75,000 at a forward rate of AUD 1 = FC 0.70.

The relevant exchange rates were as follows:

Date Spot Rate Forward rate (for 20 July 2020)
15 May 2020 AUD 1 = FC 0.80 AUD 1 = FC 0.70
30 June 2020 AUD 1 = FC 0.72 AUD 1 = FC 0.68
20 July 2020 AUD 1 = FC 0.65 AUD 1 = FC 0.65

The hedging arrangement was designated as a fair value hedge. Assume that the hedge arrangement qualified for hedge accounting under AASB 9 Financial Instruments. Also assume a discount rate of 0% for fair value calculations. The end of the reporting period for Fountain Cosmetics Ltd is 30 June.

Required

(a) Prepare the journal entries for Fountain Cosmetics Ltd to account for the above transactions and events.

(b) What was the amount of Australian dollars that Fountain Cosmetics Ltd delivered to the Eastpac Bank on 20 July 2020 in exchange for FC 75,000? How much would they have delivered if they had not entered into the forward exchange contract? Did Fountain Cosmetics Ltd benefit from entering into the forward exchange contract?

Reference no: EM132970598

Questions Cloud

Demonstrate understanding and appreciation of complexities : Demonstrate an understanding and appreciation of the complexities of managing a multifunctional business in a global environment

What is the maximum amount are willing to pay to play : wins 1 million euros with a 1 in 1 million chance. What is the maximum amount you are willing to pay to play this game? What about your relationship to risk?

Four basic forces for organization change : Describe, discuss, and give examples of the four basic forces for organization change

Identify the pricing tactics : Question A: Explain how companies with different business strategies are best served by having different operations capabilities. Provide an example.

Prepare the journal entries for fountain cosmetics ltd : Prepare the journal entries for Fountain Cosmetics Ltd to account for the above transactions and events and What was the amount of Australian dollars

Determine the cltv for the client in the four ways : Determine the CLTV for the client in the four ways using the Finance Division calculated that the client would bring in net returns of $80,000

Should a sports organization know what its stakeholders : Should a sports organization know what its stakeholders are doing? Also, should a sports organization be held accountable when a stakeholder violates a law/by-l

Prepare the report for calm teas inc : you are the main point of contact for the client and for your preliminary audit plan you must assess the risks of this engagement. Prepare the report.

Describe three product features part of product design : 1 Describe three product features that are commonly adapted as part of product design.

User Account

All Pages