Reference no: EM133104624
Question - On July 1, 2019, North Inc., based in Alberta, ordered merchandise from an American supplier for US$600,000. Delivery was scheduled for the month of October, with payment to be made in full on November 15, 2019.
Once the order was placed, North entered into a forward contract with its bank to purchase US$600,000 on the settlement date at the forward rate of CDN$1.3625. The forward contract was designated as a cash flow hedge of the cash flow required to settle with the American supplier.
The merchandise was received on October 1, 2019, when the spot rate was US$1 = CDN$1.3575. On October 31, the company's year-end, the spot rate was $1.3690. North purchased the U.S. dollars to pay its supplier on November 15, 2019 when the spot rate was CDN$1.3725. The forward rate to November 15, 2019, was CDN$1.365 on October 1 and CDN$1.37 on October 31.
A summary of the significant dates and exchange rates pertaining to this transaction are as follows:
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Spot Rates
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Forward Rates*
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July 1, 2019 (Order date and hedge date)
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US$1 = CDN$1.3445
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US$1 = CDN$1.3625
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October 1, 2019 (Delivery date)
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US$1 = CDN$1.3575
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US$1 = CDN$1.365
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October 31, 2019 (Year-end)
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CDN$1.369
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CDN$1.37
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November 15, 2019 (Settlement date)
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US$1 = CDN$1.3725
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US$1 = CDN$1.3725
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*for contracts expiring on November 15, 2019
What amount will be recorded as the value of the forward contract on October 31, 2019 (year-end) if the forward contract is recorded using the net method?
A. A liability of CDN$4,500
B. An asset of CDN$6,000
C. An asset of CDN$4,500
D. Nil