On July 1, 2019, North Inc *For Contracts Expiring on November 15, 2019
What Is the Merchandise

question 19

Multiple Choice

On July 1, 2019, North Inc., based in Alberta, ordered merchandise from an American supplier for US$600,000. Delivery was scheduled for the month of October, with payment to be made in full on November 15, 2019. Once the order was placed, North entered into a forward contract with its bank to purchase US$600,000 on the settlement date at the forward rate of CDN$1.3625. The forward contract was designated as a cash flow hedge of the cash flow required to settle with the American supplier.
The merchandise was received on October 1, 2019, when the spot rate was US$1 = CDN$1.3575. On October 31, the company's year-end, the spot rate was $1.3690. North purchased the U.S. dollars to pay its supplier on November 15, 2019 when the spot rate was CDN$1.3725. The forward rate to November 15, 2019, was CDN$1.365 on October 1 and CDN$1.37 on October 31.
A summary of the significant dates and exchange rates pertaining to this transaction are as follows:
$\begin{array}{|l|r|r|} \hline& \text { Spot Rates } & \text { Forward Rates } \\\hline \begin{array}{l}\text { July } 1,2019 \text { (Order date and } \\\text { hedge date) }\end{array} & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.3445 & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.3625 \\\hline \text { October } 1,2019 \text { (Delivery date) } & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.3575 & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.365 \\\hline \text { October 31,2019(Year-end) } & \text { CDN\$1.369 } & \text { CDN\$1.37 } \\\hline \begin{array}{l}\text { November } 15,2019 \text { (Settlement } \\\text { date) }\end{array} & \text { US\$1=CDN\$1.3725 } & \text { US\$1=CDN\$1.3725 }\\\hline\end{array}$ *for contracts expiring on November 15, 2019
What is the journal entry required to record the ordering of North's merchandise?

• A) No entry is required.
• B)
• \[\begin{array} { | l | r | r | }
• \hline \text { Merchandise inventory } & \$ 806,700 \\
• \hline \text { Account payable } & & \$ 806,700 \\
• \hline
• \end{array}\]
• C) \[\begin{array} { | l | r | r | }
• \hline \text { Merchandise irventory } & \$ 817,500 \\
• \hline \text { Account payable } & & \$ 817,500 \\
• \hline
• \end{array}\]
• D) \(\begin{array}{|l|r|r|}
• \hline \text { Merchandise inventory } & \$ 814,500 & \\
• \hline \text { Account payable } & & \$ 814,500 \\
• \hline
• \end{array}\)

---

Definitions:

Market Capitalization Rate

The expected return on a security or a portfolio, equivalent to the expected growth rate of its dividends or earnings.

Present Value of Growth Opportunities

The value today of an investment's expected growth opportunities, used to analyze potential future value creation.

ROE

Return on Equity is an indicator of a company's financial performance, illustrating the amount of profit generated per dollar of shareholders' investment.

Expected Earnings

The projected profits or income of a company, often used in assessing its stock price.