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- This topic has 1 reply, 2 voices, and was last updated 1 month ago by Kim Smith.
- February 17, 2023 at 5:54 pm #679055wishaswishParticipant
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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.
is this a cashflow hedge
if it is are jorunal entries set out like this:
DR OCI (loss) 900000
CR Financial liability 900000February 18, 2023 at 8:02 am #679072Kim SmithKeymaster
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Welcome to OpenTuition’s forums. Can you please ask in the relevant tutor forum as this general forum is for questions that are not exam specific.
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