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- February 19, 2023 at 4:52 pm #679149Nasir12345Participant
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Issue 1 Forward contract
UHN uses titanium as a component of its products. It buys Titanium in dollars.
On 1 November 2022 the UHN finance director and production director agreed that, in April 2023, UHN would need to buy a consignment of titanium for $15,000,000. This would ensure that the company would have sufficient titanium for production.
In fixing this dollar ($) price of $15,000,000 the finance director worked on the basis of the spot exchange rate of $1.50 = £1, so that cost would be fixed £10,000,000.
On 1 November 2022, to ensure it paid £10,000,000 on 30 April 2023 for the titanium, UHN took out a six-month forward contract to buy $15,000,000 and pay £10,000,000.
On 1 November 2022, the finance director documented the forward contract as a hedging instrument against the purchase of titanium but was unsure about whether this was a cashflow or fair value hedge.
On 31 December 2022, the value of $15,000,000 had depreciated and had an equivalent sterling value of £9,100,000.
No adjustments have been made in the draft financial statements for the year ended 31 December 2022 in respect of this forward contract.
UHN – Draft summary financial statements for the year ended 31 December 2022
Statement of profit or loss for the year ended 31 December 2022
Cost of sales (39,800)
Gross profit 20,640
Operating expenses (Issue 2) (10,093)
Operating profit 10,547
Finance costs (2,200)
Profit before tax 8,347
Income tax expense (1,670)
Profit for the year 6,677
Other comprehensive income and gains –
Total comprehensive income 6,677
Set out and explain how UHN should recognise the forward contract at 31 December 2022 assuming it wishes to minimise the impact of any adjustment(s) on the profit for the year ended 31 December 2022. Include journal entry(ies).February 20, 2023 at 7:43 am #679163John MoffatKeymaster
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None of the above can be asked in Paper FA – it is not in the syllabus for the exam.
Which exam are you studying for? You need to ask in the Ask the Tutor Forum for that paper 🙂
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