Reference no: EM132958180

TEL is based in Toronto, Ontario. It imports furniture from Europe and sells it to furniture dealers throughout North America. It has a December 31 fiscal year end. On November 1, 2019, TEL entered into a non-binding contract to sell furniture to a customer in the United States for $400,000 USD. The furniture was delivered on December 25, 2019. Under the terms of the contract, payment was due on January 31, 2020. On November 30, 2019, TEL hedged the transaction by entering into a forward contract to sell $400,000 USD to its bank on January 31, 2020 at a rate of $1USD = $1.20 CAN. Payment occurred on January 31, 2020. TEL opted to apply hedge accounting treatment to this transaction.

Exchange rates were as follows:

$ 1 USD = CAN$

                                     Spot rate                    Forward rate

January 1, 2019            1.0                        .99

November 1, 2019          1.2                        1.3

November 30, 2019        1.3                         1.2

December 25, 2019        1.5                          1.3

December 31, 2019         1.4                            1.1

January 31, 2020            1.3                            1.4

Problem 1) What is the fair value of the hedged item that needs to be reported on TEL's separateentity balance sheet as of Dec 31, 2019?

Problem 2) What is the fair value of the hedged item on January 31, 2020 right before the settlement of the deal?

Problem 3) What is the fair value of the hedging item that needs to be reported on TEL's separateentity balance sheet as of Dec 31, 2019?

Problem 4) Evaluate the effectiveness of the hedge on the settlement day (Jan. 31, 2020) using supportive numbers.