On July 1 2017 when the spot rate was US1 CDN11445 North In

On July 1, 2017, when the spot rate was US$1 = CDN$1.1445, North Inc., based in Alberta, ordered merchandise from an American supplier for US$600,000. Delivery was scheduled for the month of September, with payment to be made in full on November 15, 2017.

Once the order was placed, North entered into a forward contract with its bank to purchase US$600,000 on the settlement date at the forward rate of CDN$1.1625. The forward contract was designated as a cash flow hedge of the cash flow required to settle with the American supplies.

The merchandise was received on October 1, 2017, when the spot rate was US$1 = CDN$1.1575. On October 31, the company\'s year-end, the spot rate was $1.1690. North purchased the U.S. dollars to pay its supplier on November 15, 2017 when the spot rate was CDN$1.1725. The forward rate to November 15, 2017, was CDN$1.165 on October 1 and CDN$1.17 on October 31.

1) Prepare the 2016 & 2017 Journal Entries if the company invoked Cash flow hedge accounting

Solution

A. No entry is required. B. Debit Credit Merchandise Inventory CDN$686,700 Accounts Payable CDN$686,700 ($600000*1.1445) C. Debit Credit Merchandise Inventory CDN$697,500 Accounts Payable CDN$697,500 ($600000*1.1625) D. Debit Credit Merchandise Inventory CDN$701,400 Accounts Payable CDN$701,400 (600000*1.169)