Question

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 raw inventory components from its Romanian supplier for 816,000 Romanian leus (RL). On the same day, HMC entered into a forward contract for RON816,000 at the 60-day forward rate of RON1 = $0.324. 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 2,516,000 Argentinean pesos (ARS), with payment to be received on January 31, Year 5. HMC immediately entered into a forward contract for ARS2,516,000 at the two-month forward rate of ARS1 = $0.142.

During this period, the exchange rates were as follows:

	Spot Rates	Forward Rates
October 15, Year 4	RON1 = $0.311	RON1 = $0.324
December 1, Year 4	ARS1 = 0.165	ARS1 = $0.142
December 15, Year 4	RON1 = $0.303
December 31, Year 4	ARS1 = $0.149	ARS1 = $0.138

Hedge accounting is not adopted.

Required:

Prepare the Year 4 journal entries to record the transactions described above and any year-end adjusting entries. (include any memo entries that would be required.)

Answer 1

Journal Entries
Date	Ledger Name			Debit (USD)	Credit (USD)
15-Oct	By Purchase Raw Materials			$     253,776
	To Accounts Payable				$     253,776
	(Being purchase of raw materials for RON 816000@$ 0.311)
15-Dec	By Accounts Payable			$     253,776
	By Exchange Fluctuation Loss			$       10,608
	To Cash/Bank Account				$     264,384
	(Being payment for RON 816000@$ 0.324, and Exchange Fluctuation Loss is booked)
01-Dec	By Accounts Receivable			$     415,140
	To Sales A/c				$     415,140
	(Being sale of sales made for ARD 25,16,[email protected])
31-Dec	By Exchange Fluctuation Loss			$       17,612
	To Accounts Receivable				$       17,612
	(Being Exchange Loss booked on closing of year 25,16,000 @ 0.149)
31-Jan	By Cash/Bank Account			$     357,272
	By Exchange Fluctuation Loss			$       17,612
	To Accounts Receivable				$     374,884
	(Being payment received for ARS 25,16,[email protected], and Exchange Loss has been booked)

Hull Manufacturing Corp.
Date	Particulars	Amount	Ex. Rate	Amount in USD
15-Oct	Purchase	RON       816,000	$   0.311	$   253,776
15-Dec	Payment	RON     (816,000)	$   0.324	$ (264,384)
		Difference		$   (10,608)
Date	Particulars	Amount	Ex. Rate	Amount in USD
01-Dec	Sale	ARS     2,516,000	$   0.165	$   415,140
31-Dec	Closing Entry	ARS (2,516,000)	$   0.149	$ (374,884)
		Difference		$      40,256
Date	Particulars	Amount	Ex. Rate	Amount in USD
01-Jan	Opening	ARS     2,516,000	$   0.149	$   374,884
31-Jan	Receipt	ARS (2,516,000)	$   0.142	$ (357,272)
		Difference		$      17,612