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Provide journal entries to account for the hedge instrument

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Question - On 1 June, 2020, Purchase Limited enters into a firm commitment Supply Limited to buy USD 100,000 of inventory. On 1 July 2020, the Purchase Limited enters into a hedging arrangement which meets the hedge accounting criteria stipulated by the accounting standards (Australian Accounting Standards Board (AASB) 9). Purchase Limited has designated the firm commitment hedging arrangement as a fair value hedge. On 1 August 2020, Supply Limited transfers the inventory to Purchase Limited, and on that date, the Purchase Limited makes the payment. The spot and forward rates are as follows.

Date

Spot rate in AUD

Forward rate in AUD

1 June 2020

0.19

0.2

30 June 2020

0.2

0.25

1 August 2020

0.3

0.3

Required -

a) Explain at least two determinants of determining an effectiveness of a hedge instrument against a hedge.

b) Provide journal entries to account for the hedged item (firm commitment to buy inventory)

i. On 1 June 2020

ii. On 30 June 2020

iii. On 1 August 2020

c) Provide journal entries to account for the hedge instrument (forward contract)

i. On 1 June 2020

ii. On 30 June 2020

iii. On 1 August 2020

Reference no: EM132720187

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