Reference no: EM132996864

Question - Fountain Cosmetics Ltd, an Australian company that uses the Australian dollar (AUD) as its functional currency, imports and sells cosmetic and beauty products. Purchases made from foreign suppliers are denominated in foreign currency (FC).

An order for FC 75,000 of cosmetics was placed with a foreign supplier in April 2020 and the inventory was shipped, FOB shipping point, on 15 May 2020. The amount was payable to the foreign supplier on 20 July 2020.

Concerned about possible adverse exchange rate changes, Fountain Cosmetics Ltd entered into a forward exchange contract with the Eastpac Bank on 15 May 2020. The terms of the contract were that on 20 July 2020, Fountain Cosmetics Ltd would deliver AUD to the Eastpac Bank in exchange for FC 75,000 at a forward rate of AUD 1 = FC 0.70.

The relevant exchange rates were as follows:

Date Spot Rate Forward rate (for 20 July 2020)

15 May 2020 AUD 1 = FC 0.80 AUD 1 = FC 0.70

30 June 2020 AUD 1 = FC 0.72 AUD 1 = FC 0.68

20 July 2020 AUD 1 = FC 0.65 AUD 1 = FC 0.65

The hedging arrangement was designated as a fair value hedge. Assume that the hedge arrangement qualified for hedge accounting under AASB 9 Financial Instruments. Also assume a discount rate of 0% for fair value calculations. The end of the reporting period for Fountain Cosmetics Ltd is 30 June.

Required -

(a) Prepare the journal entries for Fountain Cosmetics Ltd to account for the above transactions and events.

(b) What was the amount of Australian dollars that Fountain Cosmetics Ltd delivered to the Eastpac Bank on 20 July 2020 in exchange for FC 75,000? How much would they have delivered if they had not entered into the forward exchange contract? Did Fountain Cosmetics Ltd benefit from entering into the forward exchange contract?