Accounting problem Task Twov On 1 August 2018 Paradise Ltd, an Australia entity,
ID: 2329481 • Letter: A
Question
Accounting problem
Task Twov On 1 August 2018 Paradise Ltd, an Australia entity, places an order for US$3 million of inventory with Blue Ltd, a US supplier. The goods will be purchased FOB New York. A decision is made to take outa foreign exchange forward-rate contract for US$3 million on 1 August 2018 with the Bank in which the Bank agrees to supply Paradise Ltd with US$3 million on 1 December 2018. The goods are shipped on 1 October 2018 and are paid for on 1 December 2018. Additional information The relevant exchange rates are as follows: Datep 1 August 2018* 1 October 2018. 30 October 2018 1 December 2018 Spot rate 0.75 0.73 0.70 0.72 Forward rate» 0.73 0.70 0.67p 0.72 Assume that the hedging arrangement satisfies the requirements for hedge accounting as stipulated in AASB 9 'Financial Instruments, and the management of Paradise Ltd adopts Cash flow hedge accounting. Prepare a table showing Gains/losses on the hedging instrument (the forward rate contract) and also provide necessary journal entries for Paradise LtdExplanation / Answer
A) If Paradise Ltd., an Australian company, enters into a forward rate contract with the bank then the cash outflow will be as follows: -
Aus $ 4.109
(US $ 3 million/ 0.73)
B) If Paradise Ltd., an Australian company, doesn't enter into a forward rate contract with the bank then the cash outflow will be as follows:
Aus $ 4.167
(US $ 3 million/ 0.72)
Total profit earned by Paradis Ltd, an Australian entity by entering into a forward contract will be AUS $ 0.058 (AUS $4.167- AUS$ 4.109)
The following journal will be passed in the books of M/s Paradise Ltd on 1st Decemeber 2018: -
Blue Ltd. A/C Dr $4.167
To Bank A/C AUS $4.109
To Profit of foreign exchange transaction A/C AUS $0.058
(Being forward rate contract was made)
Total US$ payment to be made (a) Rate considered(b) Total cash outflow (a/b) US $ 3 million Forward Rate as on 1 Aug 2018 (the date on which contract is entered with the bank)= 0.73Aus $ 4.109
(US $ 3 million/ 0.73)