Exam 8: Foreign Currency Transactions and Hedges

On March 1,20X2,McBride Ltd.issued a purchase order to Tao Heavy Machines (Singapore)Inc.to acquire a drilling machine for $400,000 SGD.On the same day,McBride entered into a forward contract to receive $400,000 SGD on July 31,20X2.The machine was delivered on June 1,20X2 and payment was made July 31,20X2.McBride has an April 30 year-end.The following information has been provided: Assume that the transaction qualifies as a fair-value hedge.At what amount should McBride record the drilling machine?

Which of the following statements about hedge accounting is true?

On March 1,20X2,McBride Ltd.issued a purchase order to Tao Heavy Machines (Singapore)Inc.to acquire a drilling machine for $400,000 SGD.On the same day,McBride entered into a forward contract to receive $400,000 SGD on July 31,20X2.The machine was delivered on June 1,20X2 and payment was made July 31,20X2.McBride has an April 30 year-end.The following information has been provided: Assume that the transaction qualifies as a cash-flow hedge.What is the carrying value of the machine?

Which of the following list would not be effective as a hedge for a Canadian company with a large number of transactions in Japan?

On March 1,20X2,McBride Ltd.issued a purchase order to Tao Heavy Machines (Singapore)Inc.to acquire a drilling machine for $400,000 SGD.On the same day,McBride entered into a forward contract to receive $400,000 SGD on July 31,20X2.The machine was delivered on June 1,20X2 and payment was made July 31,20X2.McBride has an April 30 year-end.The following information has been provided: Assume that the transaction qualifies as a cash-flow hedge.What is the net exchange gain (loss)that McBride should recognize in the period from May 1-July 31,20X2?

HCB,a Canadian public company,entered into the following transactions late in 20X6: • Transaction #1 - On October 15,HCB purchased inventory from a Mexican supplier for 800,000 pesos (Ps).On the same day,HCB entered into a forward contract for Ps 800,000 at the 60-day forward rate of Ps1 = $0.399.The company has designated this as a fair value hedge.The Mexican supplier was paid in full on December 15,20X6. • Transaction #2 - On November 1,HCB contracted to sell inventory to a customer in Switzerland at a selling price of CHF 400,000.The contract called for the merchandise to be delivered to the customer on December 1,with payment to be received in Swiss francs by January 31,20X7.On November 1,HBC arranged a forward contract to deliver CHF 400,000 on January 31,20X7 at a rate of CHF1 = $1.20.The company has designated this as a fair value hedge on a firm commitment. • On December 1,20X6,the forward rate on the Swiss francs to January 31,20X7 was CHF1 = $1.21 • The company has a December 31,20X6 year end.On this date the forward rates for the Swiss francs was CHF1 = $1.23. HBC has a year-end of December 31.Spot rates were as follows during this period of time: Required: The company uses the net method to record hedging transactions.Prepare the journal entries that HCB should make to record the events described above.

Short Link Company (SLC)issued a purchase order to buy a machine from Frankfurt Ltd. ,a German company,on April 2,20X6.The contract price is €650,000 and delivery is to occur on August 31,20X6.Payment is due on October 15,20X6. SCL entered into a forward contract to hedge against the Euro exchange rate for €1 million coming due on August 31,20X6.SLC has a December 31 year end. Delivery of the machine occurred on the date specified and the company paid the amount and settled the forward contract October 15,20X6. The exchange rates were as followed: Required: SLC reports under ASPE. a.Explain how the forward contract will be accounted for under ASPE. b.Prepare the journal entries to record the above transactions.

Helvetia Corp. ,a Swiss firm,bought merchandise from Bouchard Company of Quebec on December 15,20X7 for 20,000 CHF,payable on January 14,20X8.Bouchard and Helvetia both close their books on December 31.The 20,000 CHF was paid on January 14,20X8.The exchange rates for CHF1 were: Required: Provide the journal entries for Bouchard (the seller)at each of the above dates,as required.The account was not hedged by Bouchard.

Which of the following statements about the gross method of recording a hedge is true?