On 1 No 2016 Burwood Limited based in Australia ordered inve

On 1 No 2016, Burwood Limited based in Australia ordered inventories to the value of US $ 3000000 on FOB destination terms. The goods are shipped on 1 April 2017 and are paid for on 30 June 2017. Burwood Limited also entered into a forward exchange contract of  US $ 3000000 on 1 Nov 2016 with NYC Bank in which NYC Bank agrees to supply Burwood Limited with US $ 3000000 on 30 June 2017. Burwood Limited has a FY ending on 31 Dec.

Additional information on exchange rates

Management adopts cashflow hedge accounting.

Required:

Prepare a table showing gain/losses on the hedging instrument (the forward rate contract ) and also provide necessary journal entries to record the above transactions from 1.11.2016 to 30.06.2017

Date	Spot Rate	Forward Rate
1.11.2016	A$1 = US $ 0.89	A$1 = US $0.84
31.12.2016	A$1 = US $0.86	A$1 = US $0.82
1.04.2017	A$1 = US $0.85	A$1 = US $0.79
30.06.2017	A$1 = US $ 0.80	A$1 = US $ 0.80

Solution

Details are as under Date Spot Rate Forward Rate 1.11.2016 A$1 = US $ 0.89 A$1 = US $0.84 31.12.2016 A$1 = US $0.86 A$1 = US $0.82 1.04.2017 A$1 = US $0.85 A$1 = US $0.79 30.06.2017 A$1 = US $ 0.80 A$1 = US $ 0.80 Calculation for Gains or Losses from Forward Contract Fair Value of Forward Contract Change in Fair Value of Forward Contract Gain or (Loss) 1.11.2016 NA NA 31.12.2016 0.82-0.84 x 3000000 - 60,000.00 - 60,000.00 1.04.2017 0.79-0.84 x 3000000 - 150,000.00 - 90,000.00 30.06.2017 0.80-0.84 x 3000000 - 120,000.00                          30,000.00 Net Gain (Loss) - 120,000.00 Accounting Entries 31.12.2016 Debit Credit Foreign Exchange Gains or Losses                       60,000.00        Forward Contract Payable                          60,000.00 Being recognition of the change in fair value of forward exchange contract on 31.12.16 Firm Commitment                       60,000.00           Foreign Exchange Gains or Losses                          60,000.00 Being recognition of the change in fair value of firm commitment that is due to change in exchange rate Accounting Entries 1.04.2017 Debit Credit Foreign Exchange Gains or Losses                       90,000.00        Forward Contract Payable                          90,000.00 Being recognition of the change in fair value of forward exchange contract on 1.04.17 Firm Commitment                       90,000.00           Foreign Exchange Gains or Losses                          90,000.00 Being recognition of the change in fair value of firm commitment that is due to change in exchange rate Goods A/c                 3,120,000.00         Firm Committment                       120,000.00         Account Payable                    3,000,000.00 Being receipt of goods accounted for. Accounting Entries 30.06.2017 Debit Credit Forward Contract Payable                       30,000.00 Foreign Exchange Gains or Losses                          30,000.00 Being recognition of the change in fair value of forward exchange contract on 30.06.17 Foreign Exchange Gains or Losses                       30,000.00                              Firm Commitment                          30,000.00 Being recognition of the change in fair value of firm commitment that is due to change in exchange rate Account Payable                 3,000,000.00 Forward Contract Payable                     120,000.00            Cash                    3,120,000.00 Being payment/settlement made for goods supplied