A New Zealand company has a foreign denominated asset in United States dollars worth US$600,000 on the 1 July 2016. The US debtor is due to repay this debt to the New Zealand company over the next 12 months. The repayments are scheduled to take place during the following date. The Spot rate is NZ$ = US$0.72 and the indicative future spot rates are shown in the table below.
Installment 1: 1 October, 2016 (US$150,000) (NZ$ = US$0.71)
Installment 2: 1 January, 2017 (US$150,000) (NZ$ = US$0.73)
Installment 3: 1 April, 2017 (US$150,000) (NZ$ = US$0.75)
Installment 4: 1 July 2017 (US$150,000) (NZ$ = US$0.77)
Q) Assume the company is able to hedge the identified risk with a forward rate contract with a negotiated rate of NZ$ = US$0.74.
a. Identify the hedged item and hedge instrument
b. Prepare the journal entries to capture the four installments (receipts)