Reference no: EM132499586
On August 1, Year 3, Carleton Ltd. ordered machinery from a supplier in Hong Kong for HK$340,000. The machinery was delivered on October 1, Year 3, with terms requiring payment in full by December 31, Year 3. On August 2, Year 3, Carleton entered a forward contract to purchase HK$340,000 on December 31, Year 3, at a rate of $0.211. On December 31, Year 3, Carleton settled the forward contract and paid the supplier.
Exchange rates were as follows:
Spot RatesForward Rates#August 1 and 2, Year 3HK$1 = C$0.206HK$1 = C$0.211October 1, Year 3HK$1 = C$0.210HK$1 = C$0.214December 31, Year 3HK$1 = C$0.215HK$1 = C$0.215
#For contracts expiring on December 31, Year 3.
Required:
Question (a) Assume that the forward contract was designated as a cash flow hedge of the firm commitment to purchase the machinery, and that the balance in accumulated other comprehensive income on October 1 was transferred to the machinery account when the machinery was delivered. Prepare the journal entries for Year 3 to record all the activity described above and prepare journal entry for the combined effect of all entries.
Question (b) Assume that the forward contract was designated as a fair value hedge of the firm commitment to purchase the machinery and that the balance in the commitment asset/liability account on October 1 was transferred to the machinery account when the machinery was delivered. Prepare the journal
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