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On December 15, 20X8, Preprep Co., a Canadian company, entered into a contract to purchase goods from Mega-Lu Ltd., a foreign corporation.

On December 15, 20X8, Preprep Co., a Canadian company, entered into a contract to purchase goods from Mega-Lu Ltd., a foreign corporation. The terms of the contract call for the goods to be delivered to Preprep's Edmonton location on March 31, 20X9. The cost of the goods is FC500,000, to be settled on April 30, 20X9.


On December 15, 20X8, Preprep Co. also arranged for a forward contract through its bank for FC500,000. The goods were delivered on time and Preprep settled with Mega-Lu on April 30. Preprep has a February 28 year-end.


The spot and forward rates are as follows:

                                                                                         Spot Rate           Forward Rate

           December 15, 20X8                                   FC1 = $1.40 CDN   FC1 = $1.44 CDN

           February 28, 20X9                                                  $1.42                         $1.46

March 31, 20X9                                                       $1.43                         $1.47 

April 30, 20X9                                                          $1.48                         $1.48


Required:


Prepare Preprep's journal entries to reflect the above, assuming

a) the hedge is a cash flow hedge, and

b) the hedge is a fair value hedge.

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Question 1.JPG

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