Hull Manufacturing Corp. (HMC), a Canadian company, manufactures instruments used to measure the moisture content of barley and wheat. The company sells primarily to the domestic market, but in Year 3, it developed a small market in Argentina. In Year 4, HMC began purchasing semi-finished components from a supplier in Romania. The management of HMC is concerned about the possible adverse effects of foreign exchange fluctuations. To deal with this matter, all of HMC's foreign currency-denominated receivables and payables are hedged with contracts with the company's bank. The year-end of HMC is December 31.
| The following transactions occurred late in Year 4: |
|
|
On October 15, Year 4, HMC purchased components from its Romanian supplier for 820,000 Romanian leus (RL). On the same day, HMC entered into a forward contract for RL820,000 at the 60-day forward rate of RL1 = $0.428. The Romanian supplier was paid in full on December 15, Year 4.
|
| • |
On December 1, Year 4, HMC made a shipment to a customer in Argentina. The selling price was 2,520,000 Argentinean pesos (AP), with payment to be received on January 31, Year 5. HMC immediately entered into a forward contract for AP2,520,000 at the two-month forward rate of AP1 = $0.246.
|
| During this period, the exchange rates were as follows: |
|
|
|
Spot rates |
Forward rates |
| October 15, Year 4 |
RL1 = $0.415 |
|
| December 1, Year 4 |
AP1 = $0.269 |
|
| December 15, Year 4 |
RL1 = $0.407 |
|
| December 31, Year 4 |
AP1 = $0.253 |
AP1 = $0.242 |
|
| Hedge accounting is not adopted. |
|
(a) Prepare the Year 4 journal entries to record the transactions described above and any adjusting entries necessary.
(b) Prepare the December 31, Year 4, balance sheet presentation of the receivable from the Argentinean customer, and the accounts associated with the forward contract.