Tax - Hedging Exercises

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FA06 Hedging: Exercises

Exercise 1 – Hedging of an exposed receivable with a forward contract (no hedge accounting) Canuck Co., a Canadian public company, received an order for hockey sticks on October 1,
2013. Canuck sold hockey sticks to Eagle Co. for US $100,000 on November 1, 2013, with payment to be received on February 1, 2014. On November 1, Canuck Co. entered into a contract to deliver US $100,000 in exchange for Canadian dollars on February 1, 2014.
Canuck has a December 31 year-end.
Relevant exchange rates were as follows:
October 1, 2013
November 1, 2013
December 31, 2013
February 1, 2014

Spot Rate
1.00 USD = 0.98 CAD
1.00 USD = 0.97 CAD
1.00 USD = 0.95 CAD
1.00 USD = 0.99 CAD

Forward rate (for delivery of
$100,000 USD on February 1, 2014)
1.00 USD = 0.94 CAD
1.00 USD = 0.91 CAD
1.00 USD = 0.96 CAD

Prepare all journal entries for Canuck Co. for 2013 and 2014 relating to this transaction, using the “net method.”


FA06 Hedging: Exercises
Exercise 2 – Hedging of an exposed payable with term deposit (no hedge accounting)
On November 1, 2013, Steven Inc. (Steven), a Canadian company with a December 31 yearend, purchased new machinery from a foreign supplier at a cost of 400,000 FCU. The amount is due on January 31, 2014.
To hedge the risk associated with the transaction, on November 1, 2013, Steven invested in a
400,000 FCU term deposit, maturing on January 31, 2014. The interest rate on the term deposit is 2.5% per annum.
Exchange rates over the relevant period were as follows:
November 1, 2013
December 31, 2013
January 31, 2014

1.00 FCU = 1.02 CAD
1.00 FCU = 1.05 CAD
1.00 FCU = 1.01 CAD

Prepare the required journal entries for the above transaction.


FA06 Hedging: Exercises
Exercise 3 – Hedging accounting with forward contract…...

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