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Prepare the journal entries for sale and forward contract

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Reference no: EM132950830

Manitoba Exporters Inc. (MEI) sells Inuit carvings to countries throughout the world. On December 1, Year 5, MEI sold 14,500 carvings to a wholesaler in a foreign country at a selling price of 694,000 foreign currency units (FCs) when the spot rate was FC1 = $0.831. The invoice required the foreign wholesaler to remit by April 1, Year 6. On December 3, Year 5, MEI entered into a forward contract with the Royal Bank at the 120-day forward rate of FC1 = $0.871 and the spot rate was still FC1 = $0.831.

The fiscal year-end of MEI is December 31, and on this date the spot rate was FC1 = $0.847 and the forward rate was FC1 = $0.883. The payment from the foreign customer was received on April 1, Year 6, when the spot rate was FC1 = $0.892.

Assume that MEI uses hedge accounting. Also, assume that the forward element and spot elements on the forward contract are accounted for separately.

Required:

Problem (a) Prepare the journal entries for the below items assuming that MEI designates the forward contract as a cash flow hedge:

(i) The sale and the forward contract
(ii) any adjustments required on December 31
(iii) the cash received in Year 6

Problem (b) Prepare the journal entries for the same items as in part (a) assuming that MEI designates the forward contract as a fair value hedge.

(i) The sale and the forward contract
(ii) any adjustments required on December 31
(iii) the cash received in Year 6

Reference no: EM132950830

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