Reference no: EM132602261

EL 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, EL entered into a non-binding contract to sell furniture to a customer in the United States for $500,000 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, EL hedged the transaction by entering into a forward contract to sell $500,000 USD to its bank on January 31, 2020 at a rate of $1USD = $1.20 CAN. EL opted to apply hedge accounting treatment to this transaction.

Exchange rates were as follows:

January 1, 2019 November 1, 2019 November 30, 2019 December 25, 2019 December 31, 2019 January 31, 2020

$ 1 USD = CAN$

                              Spot rate                      Forward rate

Jan 1, 2019                   1.0                            .99

Nov 1, 2019                   1.2                            1.3

Nov 30, 2019                 1.3                             1.2

Dec 25, 2019                 1.5                             1.3

Dec 31, 2019                 1.4                             1.1

Jan 31, 2020                  1.3                            1.4

Question 1: What is the fair value of the hedged item that needs to be reported on EL's separate-entity balance sheet as of Dec 31, 2019?

Question 2: What is the total cumulative gain or loss from the hedged item on the settlement of the deal (please also indicate it is a gain or loss)?

Question 3: What is the fair value of the hedging item as of Dec 31, 2019? Where should it be reported on the balance sheet?

Question 4: Evaluate the effectiveness of the hedge on the financial reporting day (Dec 31, 2019) using supportive numbers.