Asked by Madison Chrisman on Apr 25, 2024
Verified
Required:
1. Provide the journal entries for Bouchard (the seller)at each of the above dates, as required. The account was not hedged by Bouchard.
2. What is hedging and why might Bouchard have decided not to hedge this transaction? What risk is Bouchard incurring?
Hedging
A strategy used in financial management to offset potential losses or gains that may be incurred by a companion investment, thereby reducing the risk of adverse price movements.
IFRS
International Financial Reporting Standards, a set of global accounting guidelines providing a common language for business affairs so that company accounts are understandable and comparable across international boundaries.
Gross Method
An accounting approach for recording purchases or sales of inventory where discounts are not taken into account until they are actually realized.
- Learn the methodology for logging transactions that involve forward contracts under the principles of fair-value and cash-flow hedge accounting.
- Show how financial statements are affected by alterations in foreign currency exchange rates.
Verified Answer
December 31, 20X7
Exchange gains and loses 80Accounts receivable (20,000×(97−974) 80\begin{array}{llr} \text { Exchange gains and loses } &80\\ \text {Accounts receivable \( (20,000 \times(97-974) \) } &&80\\\end{array} Exchange gains and loses Accounts receivable (20,000×(97−974) 8080
January 14, 20X8
Cash (20,000×.972)19,440 Accounts receivable 19,440 Exchange gains and losses 40\begin{array}{llr} \text { Cash \((20,000 \times .972) \)} &19,440\\ \text { Accounts receivable } & &19,440\\ \text { Exchange gains and losses } &&40\end{array} Cash (20,000×.972) Accounts receivable Exchange gains and losses 19,44019,44040
2. Hedging is a practice used to mitigate a risk-in this example, foreign currency risk. In this case, Bouchard is incurring a foreign currency exchange risk-the risk that the rate will change between the date the Bouchard sells the merchandise and the date when the CHF are actually received and can be converted into Canadian dollars.
Learning Objectives
- Learn the methodology for logging transactions that involve forward contracts under the principles of fair-value and cash-flow hedge accounting.
- Show how financial statements are affected by alterations in foreign currency exchange rates.
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