question archive On January 1, 2020, Brands Inc
On January 1, 2020, Brands Inc
Subject:AccountingPrice:2.84 Bought6
On January 1, 2020, Brands Inc. entered into a forward contract to purchase $200,000 US for $256,000 CAD on June 30, 2020. On March 31, 2020, the exchange rate is 1.25 CAD : $1 USD.
Assume no entries were made and you have been asked to make any required journal entry then for Brands Inc., regarding this forward contract as at March 31, 2020. You would provide one of the following:
??a)No entry required.
b) Derivative- forward contract asset DR....6,000
Gain CR....6,000
c) Loss DR....6,000
Derivative-forward contract liability CR....6,000
d) Loss DR....7,680
Derivative-forward contract liability CR....7,680
e) Derivative-forward contract asset DR....5,000
Gain CR....5,000
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c. Loss DR....6,000
Derivative-forward contract liability CR....6,000
Step-by-step explanation
| Current Price ($200,000*1.25) | 250,000 | |
| Less: Derivative -forward contract liability | (256,000) | |
| Loss | (6,000) | |
| Loss | 6,000 | |
| Derivative -forward contract liability | 6,000 |
In derivatives yoou enter into a contract to protect your self in flactuation of prices, and since you entered into buying a 200,000 at 256,000 you have anticipated that the exchange rate will be higher but your forcast is wrong since the current echange rate is only 1.25 (250,0000 so you should recognize a loss of $6,000.
