ASSIGNMENT 7
Question 1 (18 marks)
PART A:
On October 1, 2018, the treasurer of Canada Corporation took the view that the American dollar was
overvalued relative to the Canadian dollar. As a result, on that date, the company entered into a
forward sales contract with its bank to sell US$2,000,000 to the bank on March 31, 2019, at the contract
rate of $1.32. On March 31, 2019, the company purchased US$2,000,000 from the bank at that day’s
spot rate of $1.22 and settled the forward contract with the bank.
The spot rate on October 1, 2018, for the American dollar was was $1.34 and at December 31, 2018, was
$1.30. The forward rate to March 31, 2019, was $1.28 on December 31, 2018.
Required:
Prepare all the journal entries to record the transactions set out above. (6
marks)
*****
PART B:
On October 1, 2018, Canada Corporation issued a purchase order to acquire some merchandise from a
supplier in England at a cost of £300,000. The goods were to be shipped at the purchaser’s risk on
October 31, 2018, with payment due on January 15, 2019. On Oct 15, 2018, Canada Corporation
arranged a forward contract for the purchase of £300,000 from its bank with settlement on January 15,
2019. The goods arrived on November 15, 2018, and the forward contract was settled with the bank
and the supplier paid on January 15, 2019.
Canada Corporation has decided to account for the forward contract as a cash flow hedge of the firm
commitment to purchase the merchandise.
Exchange rates for the purchase of British pounds (£) were:
Spot Rate Fwd Rate (to Jan 15/19)
October 1, 2018 £1.00 = Can$1.70 £1.00 = Can$1.74
October 15, 2018 £1.00 = Can$1.72 £1.00 = Can$1.76
October 31, 2018 £1.00 = Can$1.74 £1.00 = Can$1.77
November 15, 2018 £1.00 = Can$1.76 £1.00 = Can$1.78
December 31, 2018 £1.00 = Can$1.79 £1.00 = Can$1.80
January 15, 2019 £1.00 = Can$1.75
Required:
Prepare all the journal entries to record the transactions set out above. (12
marks)
*****
Question 2 (16 marks)
Hitech Industries Inc., a Canadian company, entered into the following transactions during 2015:
a) On January 2, the company borrowed US $2,000,000 from an American bank with the principal
amount, together with interest at 5%, repayable on January 1, 2016.
b) On April 1, the company purchased some machinery from an American supplier at a cost of US
$400,000 with payment due on May 31. The equipment had an estimated useful life of ten years
and no residual value expected at the end of that time. On December 31, 2015, the supplier’s selling
price for the equipment had dropped to $380,000.
c) On July 2, the company bought 10,000 shares of American Industries Ltd. common stock at a price of
$10 U.S. per share, paying cash on that day. The investment was reported at fair value with
revaluation gains and losses through profit and loss. Shares of American Industries were trading for
$11.50 at the close of business on December 31, 2015.
d) On December 1, 2015, the company purchased some inventory from an American supplier at a cost
of US $60,000 with payment due on January 31, 2016. At the end of 2015, half the inventory was
still on hand. The supplier’s price for the inventory items had fallen 20% during the month of
December.
Selected exchange rates during 2015 were as follows:
January 2 US$1.00 = Can$1.26
April 1 US$1.00 = Can$1.28
May 31 US$1.00 = Can$1.30
July 2 US$1.00 = Can$1.32
December 1 US$1.00 = Can$1.37
December 31 US$1.00 = Can$1.38
Average for 2015 US$1.00 = Can$1.32
Required:
Prepare all 2015 journal entries related to these transactions, including any adjusting entries required at
the company’s December 31, 2015, year-end.
*****
Question 3 (16 marks)
Bunting Industries Inc., a Canadian public company, entered into a sales contract on November 17,
2014, to sell some specialized equipment to Robin plc, a Scottish company, for £500,000. The
equipment was to be delivered to the customer on February 15, 2015, with payment due on April 15,
2015. In order to hedge this anticipated receivable, Bunting entered into a forward contract on
November 17, 2014, with its bank to sell to the bank £500,000 on April 15, 2015. This contract was
designated as a cash flow hedge of the expected receivable from Robin plc.
Exchange rates for the sale of British Pounds over this period were:
Spot Rate Fwd Rate
to Apr 15/15
November 17, 2014 $ 1.700 $ 1.690
December 31, 2014 $ 1.715 $ 1.704
February 15, 2015 $ 1.724 $ 1.719
March 31,2015 $ 1.737 $ 1.734
April 15, 2015 $ 1.750 $ 1.750
The equipment changed hands on February 15, 2015, as expected and Bunting received payment and
settled with its bank on April 15, 2015. Cost of the equipment to Bunting Industries Inc. was $650,000.
Required:
a) Prepare journal entries to record the transactions set out above. Include adjusting entries at each
quarter end as Bunting is required to prepare quarterly financial statements for the market.
b) What balances will appear on the December 31, 2014, balance sheet of Bunting Enterprises Inc. with
respect to these transactions? Indicate whether each such balance is a debit or a credit.
c) What balances will appear on the March 31, 2015, balance sheet of Bunting Enterprises Inc. with
respect to these transactions? Again indicate whether each such balance is a debit or a credit.
END OF ASSIGNMENT
