Deck 8: Foreign Currency Transactions and Hedges

Question 1

Which approach to foreign currency transactions does IFRS support?

A)One-transaction approach
B)Two-transaction approach
C)Economic theory approach
D)Rate theory approach

Answer 1

B

Question 2

Which of the following statements is true about the two-transaction theory?

A)Exchange gains and losses usually flow through to net income in the period in which they are incurred.
B)Exchange gains and losses are attached to the sales or assets from the original transaction.
C)Exchange gains and losses are considered a cost of acquiring assets.
D)Exchange gains and losses affect the carrying value of acquired assets.

Answer 2

A

Question 3

On November 2, 20X9, Henry Company purchased a machine for 100,000 Swiss francs (CHF)with payment required on March 30, 20X10. To eliminate the risk of foreign exchange losses on this payable, Henry entered into a forward exchange contract on November 3, 20X9, to receive CHF 100,000 at a forward rate of CHF1 = $2 on March 30, 20X10. The spot rate was CHF1 = $1.95 on November 2, 20X9, and CHF1 = $1.97 on December 1, 20X9.

- What is the amount of the premium or discount on the forward exchange contract on December 1, 20X9?

A)A premium of $3,000
B)A discount of $3,000
C)A premium of $5,000
D)A discount of $5,000

Answer 3

A premium of $5,000

Question 4

On December 1, 20X5, Gillard Ltd. sold goods to International Traders Ltd., a company located in Switzerland, for 500,000 Swiss francs (CHF). At the date of sale, the spot rate was CHF1 = $1.0329. On the same date, Gillard acquired a 90-day forward contract at a rate of CHF1 = $1.0315. On March 1, 20X6, Gillard received full payment from International Traders and delivered the Swiss francs in execution of the forward contract. The spot rate at March 1, 20X6, was CHF1 = $1.0287. Assume that Gillard has a December 31 year-end and that the spot rate on that date was CHF1 = $1.0302. At December 31, the forward rate for a 60-day contract was CHF1 = 1.0394.

- At December 31, what is the balance of Gillard's accounts receivable?

A)$515,100
B)$515,700
C)$516,450
D)$517,800

Question 5

Which of the following items is a non-monetary item?

A)Cash
B)Accounts receivable
C)Inventory
D)Accounts payable

Question 6

What is a currency swap an example of?

A)A futures contract
B)A call option
C)A derivative instrument
D)A forward contract

Question 7

What exchange rate is usually used to report non-monetary assets on the statement of financial position?

A)Historical rate
B)Spot rate
C)Closing rate
D)Fair value

Question 8

What is the exchange rate in effect at the date of the transaction called?

A)Closing rate
B)Spot rate
C)Forward rate
D)Settlement rate

Question 9

Which of the following is not a major reason for fluctuating exchange rates?

A)Differences in inflation rates
B)Black market (illegal)trading of currencies
C)Differences in interest rates
D)Trade surpluses and deficits between countries

Question 10

Phan Ltd., a Canadian company, sold goods to a foreign customer for 1,000,000 foreign currency (FC)units, which was equivalent to $500,000 CAD. By the time the customer paid Phan, the exchange rates had changed and 1,000,000 FC units was equivalent to $515,000 CAD. How should the resulting $15,000 CAD difference between the sale and payment dates be treated?

A)As an increase in sales
B)As a decrease to cost of sales
C)As a realized gain
D)As an unrealized gain

Question 11

Which of the following statements is true?

A)The historical rate is the exchange rate at the beginning of the reporting period, and the closing rate is the exchange rate at the end of the reporting period.
B)The historical rate is the exchange rate at the date of the transaction, and the closing rate is the exchange rate at the end of the reporting period.
C)The spot rate is the exchange rate at the date of the transaction, and the closing rate is the exchange rate at the conclusion of a hedge instrument.
D)The historical rate is the exchange rate at the beginning of the reporting period, and the forward rate is the exchange rate at the end of the reporting period.

Question 12

On November 2, 20X9, Henry Company purchased a machine for 100,000 Swiss francs (CHF)with payment required on March 30, 20X10. To eliminate the risk of foreign exchange losses on this payable, Henry entered into a forward exchange contract on November 3, 20X9, to receive CHF 100,000 at a forward rate of CHF1 = $2 on March 30, 20X10. The spot rate was CHF1 = $1.95 on November 2, 20X9, and CHF1 = $1.97 on December 1, 20X9.

- How should the premium or discount on the forward exchange contract be accounted for?

A)It should be expensed on the inception date of the forward exchange contract.
B)It should be expensed over the five-month term of the forward exchange contract.
C)It should be expensed on the maturity date of the forward exchange contract.
D)It should be added to the cost of the machine.

Question 13

A business plans to acquire a forward contract to hedge a monetary liability. Which of the following statements about the forward contract is true?

A)If the contract is acquired at a premium, a loss results, and if the contract is acquired at a discount, a gain results.
B)If the contract is acquired at a premium, a gain results, and if the contract is acquired at a discount, a loss results.
C)Since the contract is to hedge a monetary liability, a loss results, regardless of whether the contract is acquired at a premium or a discount.
D)Since the contract is to hedge a monetary liability, a gain results, regardless of whether the contract is acquired at a premium or a discount.

Question 14

Under IFRS, how are monetary assets and liabilities defined?

A)Cash and assets and liabilities that are to be received or paid in a fixed or determinable amount of currency
B)Current assets and liabilities that are to be received or paid in a fixed or determinable amount of currency
C)Cash and long-term assets and liabilities that are to be received or paid in a fixed or determinable amount of currency
D)Long-term assets and liabilities that are to be received or paid in a fixed or determinable amount of currency

Question 15

On December 1, 20X5, Gillard Ltd. sold goods to International Traders Ltd., a company located in Switzerland, for 500,000 Swiss francs (CHF). At the date of sale, the spot rate was CHF1 = $1.0329. On the same date, Gillard acquired a 90-day forward contract at a rate of CHF1 = $1.0315. On March 1, 20X6, Gillard received full payment from International Traders and delivered the Swiss francs in execution of the forward contract. The spot rate at March 1, 20X6, was CHF1 = $1.0287.

-What is the net exchange gain (loss)on the forward contract?

A)$(2,100)
B)$(700)
C)$700
D)$1,400

Question 16

Exchange gains and losses on accounts receivable/payable that are denominated in a foreign currency are ________.

A)deferred and reported upon settlement
B)reported as adjustments to the transaction prices
C)reported as equity adjustments from translation
D)recognized in the periods in which exchange rates change

Question 17

What is the effect of fluctuations in exchange rates on accounts payable?

A)Deferred and amortized
B)Deferred to maturity
C)Recognized immediately in income
D)Recognized if losses, deferred if gains

Question 18

What does the holder of a put option on foreign currency have the right to do?

A)Right to buy the currency
B)Right to sell the currency
C)Right to do a currency swap
D)Right to acquire a forward contract

Question 19

On December 1, 20X5, Gillard Ltd. sold goods to International Traders Ltd., a company located in Switzerland, for 500,000 Swiss francs (CHF). At the date of sale, the spot rate was CHF1 = $1.0329. On the same date, Gillard acquired a 90-day forward contract at a rate of CHF1 = $1.0315. On March 1, 20X6, Gillard received full payment from International Traders and delivered the Swiss francs in execution of the forward contract. The spot rate at March 1, 20X6, was CHF1 = $1.0287. Assume that Gillard has a December 31 year-end and that the spot rate on that date was CHF1 = $1.0302. At December 31, the forward rate for a 60-day contract was CHF1 = 1.0394.

-At December 31, what is the balance of Gillard's forward contract payable?

A)$515,000
B)$515,650
C)$515,750
D)$515,850

Question 20

On December 1, 20X5, Gillard Ltd. sold goods to International Traders Ltd., a company located in Switzerland, for 500,000 Swiss francs (CHF). At the date of sale, the spot rate was CHF1 = $1.0329. On the same date, Gillard acquired a 90-day forward contract at a rate of CHF1 = $1.0315. On March 1, 20X6, Gillard received full payment from International Traders and delivered the Swiss francs in execution of the forward contract. The spot rate at March 1, 20X6, was CHF1 = $1.0287.

-What amount should Gillard record for the sale?

A)$500,000
B)$514,300
C)$515,750
D)$516,450

Question 21

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: $\begin{array}{|l|c|c|}\hline \text { Date } & \text { Spot Rate } & \text { Forward rate to July } 31,20 \times 2 \\\hline \text { March } 1,20 \times 2 & .7686 & .7810 \\\hline \text { April } 30,20 \times 2 & .7702 & .7818 \\\hline \text { June } 1,20 \times 2 & .7940 & .7985 \\\hline \text { July } 31,20 \times 2 & .7995 & \text { n/a }\\\hline \end{array}$


-Assume that the transaction qualifies as a cash-flow hedge. What is the carrying value of the machine?

A)$307,440
B)$310,600
C)$312,400
D)$317,600

Question 22

Under IFRS, which of the following statements about hedging a foreign currency risk of an accepted purchase order is true?

A)It must be accounted for using a fair-value hedge.
B)It must be accounted for using a cash-flow hedge.
C)It can be accounted for using either a fair-value hedge or a cash-flow hedge.
D)It is not eligible for hedge accounting until it becomes an accounts payable.

Question 23

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: $\begin{array}{|l|c|c|}\hline \text { Date } & \text { Spot Rate } & \text { Forward rate to July } 31,20 \times 2 \\\hline \text { March } 1,20 \times 2 & .7686 & .7810 \\\hline \text { April } 30,20 \times 2 & .7702 & .7818 \\\hline \text { June } 1,20 \times 2 & .7940 & .7985 \\\hline \text { July } 31,20 \times 2 & .7995 & \text { n/a }\\\hline \end{array}$


-Assume that the transaction qualifies as a fair-value hedge. At what amount should McBride record the drilling machine?

A)$307,440
B)$312,400
C)$317,600
D)$319,800

Question 24

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: $\begin{array}{|l|c|c|}\hline \text { Date } & \text { Spot Rate } & \text { Forward rate to July } 31,20 \times 2 \\\hline \text { March } 1,20 \times 2 & .7686 & .7810 \\\hline \text { April } 30,20 \times 2 & .7702 & .7818 \\\hline \text { June } 1,20 \times 2 & .7940 & .7985 \\\hline \text { July } 31,20 \times 2 & .7995 & \text { n/a }\\\hline \end{array}$


- 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 to July 31, 20X2?

A)$(2,200)
B)$(1,800)
C)$ 0
D)$400

Question 25

On June 1, 20X4, Chua (Canada)Co. entered into a 90-day forward contract to sell $500,000 Singapore dollars (SGD)to its bank on August 29, 20X4. The following information has been provided:
June 1, 90-day forward rate SGD$1 = $0.7750
July 1, 60-day forward rate SGD$1 = $0.7630
August 29, spot rate SGD$1 = $0.748

-
Chua has a June 30 year-end. What is the net exchange gain (loss)on the contract?

A)$(13,500)
B)$(6,000)
C)$6,000
D)$13,500

Question 26

Where is the ineffective portion of a cash-flow hedge recognized on the financial statements?

A)As part of net income
B)As part of other comprehensive income
C)As a separate component of equity
D)It does not appear on the financial statements.

Question 27

Which of the following statements about hedge accounting is true?

A)Hedge accounting is mandatory.
B)Hedge accounting is optional.
C)Hedge accounting is applicable only if a receivable is being hedged.
D)Hedge accounting is applicable only if a liability is being hedged.

Question 28

Under accounting standards for private enterprises, which of the following can be used as hedging instruments?

A)Options
B)Forward contracts
C)Futures contracts
D)Currency swaps

Question 29

Under accounting standards for private enterprises, what exchange rate is used for non-monetary items carried at fair value?

A)The exchange rate at the date the item was ordered
B)The exchange rate at the date the item was received
C)The exchange rate at the date of payment for the item
D)The exchange rate at the statement of financial position date

Question 30

Under IFRS, which of the following statements is true?

A)The hedge of a forecasted transaction is accounted for using a fair-value hedge.
B)The hedge of a firm commitment is accounted for using a cash-flow hedge.
C)The gain or loss on a hedging instrument under a cash-flow hedge is first reported as other comprehensive income and then reclassified to income when the hedged item affects income.
D)The gain or loss on a hedging instrument under a fair-value hedge is first reported as other comprehensive income and then reclassified to income when the hedged item affects income.

Question 31

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: $\begin{array}{|l|c|c|}\hline \text { Date } & \text { Spot Rate } & \text { Forward rate to July } 31,20 \times 2 \\\hline \text { March } 1,20 \times 2 & .7686 & .7810 \\\hline \text { April } 30,20 \times 2 & .7702 & .7818 \\\hline \text { June } 1,20 \times 2 & .7940 & .7985 \\\hline \text { July } 31,20 \times 2 & .7995 & \text { n/a }\\\hline \end{array}$


-Assume that the transaction qualifies as a fair-value hedge. On March 1, at what amount should the forward contract be recorded?

A)$307,440
B)$312,400
C)$317,600
D)$319,800

Question 32

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 rate for the Swiss franc was CHF1 = $1.23.
HBC has a year-end of December 31. Spot rates were as follows during this period of time:
$\begin{array}{lll}\text { October 15, 20X6 } & \text { Ps1 }=\$ 0.396 & \text { SF1 }=\$ 1.19 \\\text { November } 1,20X6 & \text { Ps1 }=\$ 0.391 & \text { SF1 }=\$ 1.17 \\\text { December } 1,20X6 & \text { Ps1 }=\$ 0.389 & \text { SF1 }=\$ 1.20\\\text { December } 15,20 \times 6 & \mathrm{Ps} 1=\$ 0.388 & \mathrm{SF} 1=\$ 1.19 \\\text { December } 31,20 \times 6 & \mathrm{Ps} 1=\$ 0.381 & \mathrm{SF} 1=\$ 1.21 \\\text { January } 31,20 \times 7 & \mathrm{Ps} 1=\$ 0.376 & \mathrm{SF} 1=\$ 1.19\end{array}$


- 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.

Question 33

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: $\begin{array}{|l|c|c|}\hline \text { Date } & \text { Spot Rate } & \text { Forward rate to July } 31,20 \times 2 \\\hline \text { March } 1,20 \times 2 & .7686 & .7810 \\\hline \text { April } 30,20 \times 2 & .7702 & .7818 \\\hline \text { June } 1,20 \times 2 & .7940 & .7985 \\\hline \text { July } 31,20 \times 2 & .7995 & \text { n/a }\\\hline \end{array}$


- Assume that the transaction qualifies as a cash-flow hedge. What amount should be recognized as other comprehensive income at April 30, 20X2?

A)$ 320
B)$ 640
C)$4,640
D)$5,280

Question 34

Fransen Co. does a lot of businesses in Denmark. It has numerous trade accounts receivables and accounts payables that are to be settled in Danish krones. What type of hedge does Fransen have?

A)Fair-value hedge
B)Cash-flow hedge
C)Natural hedge
D)Hedge instrument

Question 35

Which of the following is not one of the conditions that must be met to qualify for hedge accounting?

A)The hedge relationship must be designated and documented.
B)The hedge is expected to be effective.
C)The effectiveness of the hedge can easily be determined.
D)The hedge is assessed at the beginning and at the end of the hedging period.

Question 36

On June 1, 20X4, Chua (Canada)Co. entered into a 90-day forward contract to sell $500,000 Singapore dollars (SGD)to its bank on August 29, 20X4. The following information has been provided:
June 1, 90-day forward rate SGD$1 = $0.7750
July 1, 60-day forward rate SGD$1 = $0.7630
August 29, spot rate SGD$1 = $0.748

-
Chua has a June 30 year-end. What is the exchange gain (loss)at June 30, 20X4?

A)$(6,000)
B)$0
C)$1,500
D)$6,000

Question 37

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: $\begin{array}{|l|c|c|}\hline \text { Date } & \text { Spot Rate } & \text { Forward rate to July } 31,20 \times 2 \\\hline \text { March } 1,20 \times 2 & .7686 & .7810 \\\hline \text { April } 30,20 \times 2 & .7702 & .7818 \\\hline \text { June } 1,20 \times 2 & .7940 & .7985 \\\hline \text { July } 31,20 \times 2 & .7995 & \text { n/a }\\\hline \end{array}$


- Assume that the transaction qualifies as a fair-value hedge. What is the cost of the hedge?

A)$2,200
B)$4,640
C)$4,960
D)$6,680

Question 38

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: $\begin{array}{|l|c|c|}\hline \text { Date } & \text { Spot Rate } & \text { Forward rate to July } 31,20 \times 2 \\\hline \text { March } 1,20 \times 2 & .7686 & .7810 \\\hline \text { April } 30,20 \times 2 & .7702 & .7818 \\\hline \text { June } 1,20 \times 2 & .7940 & .7985 \\\hline \text { July } 31,20 \times 2 & .7995 & \text { n/a }\\\hline \end{array}$


- Assume that the transaction qualifies as a fair-value hedge. What amount of exchange gain (loss)should be recognized at April 30, 20X2?

A)$(640)
B)$(320)
C)$ 0
D)$320

Question 39

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: $\begin{array}{|l|c|c|}\hline \text { Date } & \text { Spot Rate } & \text { Forward rate to July } 31,20 \times 2 \\\hline \text { March } 1,20 \times 2 & .7686 & .7810 \\\hline \text { April } 30,20 \times 2 & .7702 & .7818 \\\hline \text { June } 1,20 \times 2 & .7940 & .7985 \\\hline \text { July } 31,20 \times 2 & .7995 & \text { n/a }\\\hline \end{array}$


-Assume that the transaction qualifies as a cash-flow hedge. What is the cost of the hedge?

A)$ 1,800
B)$ 2,200
C)$ 4,960
D)$12,360

Question 40

Which of the following cannot usually be a hedged item?

A)Accounts receivable
B)Accounts payable
C)Derivative instrument
D)Purchase order

Question 41

Compare and contrast accounting for foreign currency transactions and hedge accounting under IFRS and ASPE.

Question 42

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 rate for the Swiss franc was CHF1 = $1.23.
HBC has a year-end of December 31. Spot rates were as follows during this period of time:
$\begin{array}{lll}\text { October 15, 20X6 } & \text { Ps1 }=\$ 0.396 & \text { SF1 }=\$ 1.19 \\\text { November } 1,20X6 & \text { Ps1 }=\$ 0.391 & \text { SF1 }=\$ 1.17 \\\text { December } 1,20X6 & \text { Ps1 }=\$ 0.389 & \text { SF1 }=\$ 1.20\\\text { December } 15,20 \times 6 & \mathrm{Ps} 1=\$ 0.388 & \mathrm{SF} 1=\$ 1.19 \\\text { December } 31,20 \times 6 & \mathrm{Ps} 1=\$ 0.381 & \mathrm{SF} 1=\$ 1.21 \\\text { January } 31,20 \times 7 & \mathrm{Ps} 1=\$ 0.376 & \mathrm{SF} 1=\$ 1.19\end{array}$


- Required:
The company uses the gross method to record hedging transactions. Prepare the journal entries that HCB should make to record the events described above.

Question 43

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 €650,000, 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 follows:
$$\begin{array} { | l | c | c | } \hline \text { Canadian equivalent of euro } & \text { Spot rate } & \begin{array} { c } \text { Forward rate to } \\\text { January } 30,20X7\end{array} \\\hline \text { April } 2,20X6 & 1.50 & 1.59 \\\hline \text { August } 31,20X6 & 1.63 & 1.67 \\\hline \text { October } 15,20X6 & 1.66 & \text { settled } \\\hline\end{array}$$ 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.

Question 44

Beauty Care Limited (BCL)manufactures and distributes leather furniture to various companies in Europe. On April 2, 20X6, BCL entered into a sales contract with a company in Germany to sell 1,000 sofas. The contract price is €2,000 per sofa. Five hundred sofas are to be delivered in May 15, 20X6, and the remaining half is to be delivered on December 20, 20X6. Payment is due in two instalments, with half due on August 31, 20X6, and the remaining half due January 30, 20X7. However, the customer has the right to cancel the contract with 30 days' notice.
BCL entered into a forward contract to hedge against the euro exchange rate for €1 million, each coming due on January 30, 20X7. BCL has an October 31 year-end.
Delivery of the furniture occurred on the dates specified and the company collected the receivables due and settled the forward contract January 30, 20X7.
The exchange rates were as follows:
$\begin{array}{|l|l|l|}\hline & & \text { Forward rate to } \\&&\text { January } 30, \\\text { Canadian equivalent of euro } & \text { Spot rate } & 20 \times 7 \\ \hline \text { April } 2,20 \times 6 & 1.50 & 1.54 \\\hline \text {June } 30,20 \times 6 & 1.51 & 1.57 \\\hline \text { August } 31,20 \times 6 & 1.53 & 1.58 \\\hline \text { October } 31,20 \times 6 & 1.55 & 1.56 \\\hline \text { December } 20,20 \times 6 & 1.59 & 1.61 \\\hline \text { January } 30,20 \times 7 & 1.63 & \text { settled } \\\hline\end{array}$


-Required:
Assume that the forward contract is designated as a cash flow hedge, since the sale is highly probable. Prepare the journal entries to record the sales and the derivative. Use the gross method to record the journal entries. BCL reports under IFRS.

Question 45

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:
$\begin{array}{ll}\text { December } 15,20X7 \text { spot } & C \$ .9740 \\\text { December } 15,20X7\text { 30-day forward } & C \$ 9800 \\\text { December } 31,20X7 & C \$ .9700 \\\text { December } 31,20X7 \text { 14-day forward } & C \$ .9730 \\\text { lanuary } 14,20 \times 8 & C \$ .9720\end{array}$
The account was hedged by Bouchard through a 30-day forward contract. Bouchard uses the gross method to record hedge transactions. Bouchard reports under IFRS.

- Required:
1. Provide the journal entries for Bouchard (the seller)at each of the above dates, as required. The account was not hedged by Bouchard.
2. What is hedging and why might Bouchard have decided not to hedge this transaction? What risk is Bouchard incurring?

Question 46

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:
$\begin{array}{ll}\text { December } 15,20X7 \text { spot } & C \$ .9740 \\\text { December } 15,20X7\text { 30-day forward } & C \$ 9800 \\\text { December } 31,20X7 & C \$ .9700 \\\text { December } 31,20X7 \text { 14-day forward } & C \$ .9730 \\\text { lanuary } 14,20 \times 8 & C \$ .9720\end{array}$
The account was hedged by Bouchard through a 30-day forward contract. Bouchard uses the gross method to record hedge transactions. Bouchard reports under IFRS.

-
Required:
Provide the journal entries for Bouchard (the seller)at each of the above dates, as required.

Question 47

Part 1: 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:
$\begin{array}{ll}\text { December } 15,20 \times 7 \text { spot } & C \$ .9740 \\\text { December } 15,20 \times 730 \text {-day forward } & C \$ .9800 \\\text { December } 31,20 \times 7 & C \$ .9700 \\\text { December } 31,20 \times 7 \text { 14-day forward } & C \$ .9730 \\\text { January } 14,20 \times 8 & C \$ .9720\end{array}$
Required:
Provide the journal entries for Helvetia (the buyer)at each of the above dates, as required.
Part 2: Helvetia also had the following balances on its SFP at December 31, 30X7:
• Inventory purchased from a Canadian company for $50,000 on December 15, 20X7, for cash
• 1,000 shares of B C Inc., purchased on December 15, 20X7, for $40 per share. On December 31, 20X7, the B. C. Inc. shares were trading at $42 per share. These shares are classified at FVTPL.
• Helvetia purchased an investment property in Canada on December 15, 20X7, for $5.5 million. On December 31, 20X7, this property was valued at $5.6 million. Helvetia uses the fair-value method to report its investment properties.
For each of the above assets, explain the value that would be recognized on its SFP as at its year-end of December 31, 20X7, and any related amounts reported on the SCI.

Question 48

Under IFRS, a hedging relationship qualifies for special hedge accounting rules only if it meets five conditions.
Required:
Explain the conditions that must be met for a derivative to qualify for special hedge accounting. Identify what qualifies as a hedged item. Identify what qualifies as a hedging instrument. Outline the conditions required for a hedge to be effective.

Question 49

Beauty Care Limited (BCL)manufactures and distributes leather furniture to various companies in Europe. On April 2, 20X6, BCL entered into a sales contract with a company in Germany to sell 1,000 sofas. The contract price is €2,000 per sofa. Five hundred sofas are to be delivered in May 15, 20X6, and the remaining half is to be delivered on December 20, 20X6. Payment is due in two instalments, with half due on August 31, 20X6, and the remaining half due January 30, 20X7. However, the customer has the right to cancel the contract with 30 days' notice.
BCL entered into a forward contract to hedge against the euro exchange rate for €1 million, each coming due on January 30, 20X7. BCL has an October 31 year-end.
Delivery of the furniture occurred on the dates specified and the company collected the receivables due and settled the forward contract January 30, 20X7.
The exchange rates were as follows:
$\begin{array}{|l|l|l|}\hline & & \text { Forward rate to } \\&&\text { January } 30, \\\text { Canadian equivalent of euro } & \text { Spot rate } & 20 \times 7 \\ \hline \text { April } 2,20 \times 6 & 1.50 & 1.54 \\\hline \text {June } 30,20 \times 6 & 1.51 & 1.57 \\\hline \text { August } 31,20 \times 6 & 1.53 & 1.58 \\\hline \text { October } 31,20 \times 6 & 1.55 & 1.56 \\\hline \text { December } 20,20 \times 6 & 1.59 & 1.61 \\\hline \text { January } 30,20 \times 7 & 1.63 & \text { settled } \\\hline\end{array}$


- Required:
Assume that the forward contract is designated as a cash flow hedge, since the sale is highly probable. Prepare the journal entries to record the sales and the hedge. Use the net method to record the journal entries. BCL reports under IFRS.