RXN's year-end is on December 31. On November 1, 2019 when the U.S. dollar was worth CDN$1.365, RXN sold merchandise to an American client for US$300,000. Full payment of this invoice was expected by March 1, 2020. On December 1, the spot rate was CDN$1.3450 and the three-month forward rate was CDN$1.3250. In order to minimize its Foreign Exchange risk and exposure, RXN entered into a forward contract with its bank on December 1, 2019 to deliver US$300,000 in three months' time. The spot rate at year-end was CDN$1.36 and the forward rate from December 31, 2019 to March 1, 2020 was CDN$1.34. On March 1, 2020, RXN received the US$300,000 from its client and settled its contract with the bank. The forward contract was to be accounted for as a fair value hedge of the US dollar receivable.
Significant dates and exchange rates pertaining to this transaction are as follows:
$$\begin{array} { | l | r | r | }
\hline & \text { Spat Rates } & \text { For ward Rates } \
\hline \begin{array} { l }
\text { Novernber } 1,2019 \
\text { (Trarsaction date) }
\end{array} & \text { US } \$ 1 = \text { CDN } \$ 1.365 & \
\hline \begin{array} { l }
\text { December } 1,2019 \text { (Hedged } \
\text { date) }
\end{array} & \text { US } \$ 1 = \text { CDN\$1.3450 } & \text { US\$1 = CDN\$1.3250 } \
\hline \begin{array} { l }
\text { December } 31,2019 \text { (Year- } \
\text { end) }
\end{array} & \text { CDN } \$ 1.36 & \text { CDN } \$ 1.34 \
\hline \begin{array} { l }
\text { March } 1,2020 \text { (Settlement } \
\text { date) }
\end{array} & \text { US } \$ 1 = \text { CDN } \$ 1.368 & \text { US } \$ 1 = \text { CDN\$1.368. } \
\hline
\end{array}$$ *for contracts expiring on March 1, 2020
What is the amount of the exchange gain or loss from the recognition of the hedge discount recognized during 2019?
A) A loss of CDN$4,500.
B) A loss of CDN$3,000.
C) A gain of $ CDN4,500.
D) Nil.

Question

RXN's year-end is on December 31. On November 1, 2019 when the U.S. dollar was worth CDN$1.365, RXN sold merchandise to an American client for US$300,000. Full payment of this invoice was expected by March 1, 2020. On December 1, the spot rate was CDN$1.3450 and the three-month forward rate was CDN$1.3250. In order to minimize its Foreign Exchange risk and exposure, RXN entered into a forward contract with its bank on December 1, 2019 to deliver US$300,000 in three months' time. The spot rate at year-end was CDN$1.36 and the forward rate from December 31, 2019 to March 1, 2020 was CDN$1.34. On March 1, 2020, RXN received the US$300,000 from its client and settled its contract with the bank. The forward contract was to be accounted for as a fair value hedge of the US dollar receivable.
Significant dates and exchange rates pertaining to this transaction are as follows:
$$\begin{array} { | l | r | r | } 
\hline & \text { Spat Rates } & \text { For ward Rates } \
\hline \begin{array} { l } 
\text { Novernber } 1,2019 \
\text { (Trarsaction date) }
\end{array} & \text { US } \$ 1 = \text { CDN } \$ 1.365 & \
\hline \begin{array} { l } 
\text { December } 1,2019 \text { (Hedged } \
\text { date) }
\end{array} & \text { US } \$ 1 = \text { CDN\$1.3450 } & \text { US\$1 = CDN\$1.3250 } \
\hline \begin{array} { l } 
\text { December } 31,2019 \text { (Year- } \
\text { end) }
\end{array} & \text { CDN } \$ 1.36 & \text { CDN } \$ 1.34 \
\hline \begin{array} { l } 
\text { March } 1,2020 \text { (Settlement } \
\text { date) }
\end{array} & \text { US } \$ 1 = \text { CDN } \$ 1.368 & \text { US } \$ 1 = \text { CDN\$1.368. } \
\hline
\end{array}$$ *for contracts expiring on March 1, 2020
What is the amount of the exchange gain or loss from the recognition of the hedge discount recognized during 2019?
A) A loss of CDN$4,500.
B) A loss of CDN$3,000.
C) A gain of $ CDN4,500.
D) Nil.

Quizplus · Accepted Answer

The hedge was entered into at a forward rate of CDN$1.3250 on December 1, 2019, and the rate applicable at year-end (December 31, 2019) for contracts expiring on March 1, 2020, was CDN$1.34. Since the hedge is accounted for at fair value, changes in the fair value of the forward contract would be recognized. However, the question asks specifically about the "hedge discount recognized during 2019," which implies the recognition of any gain or loss directly attributable to the period within 2019. Since the forward contract was entered into on December 1, 2019, and the year-end is December 31, 2019, any unrealized gain or loss on the forward contract due to changes in the forward rate would be recognized in the accounting period. However, the question's phrasing about the "hedge discount" does not directly translate into a realized gain or loss within the 2019 period without further specific transactions or adjustments being mentioned. Therefore, without additional information on specific transactions affecting the hedge's accounting within 2019 beyond its establishment and the year-end rate change, the answer is D) Nil, as the question seems to focus on the recognition of a specific discount or adjustment directly within 2019, which is not explicitly detailed.

RXN's Year-End Is on December 31 *For Contracts Expiring on March 1, 2020 What Is the When

RXN's Year-End Is on December 31 *For Contracts Expiring on March 1, 2020
What Is the When