On July 1, 2019, North Inc *For Contracts Expiring on November 15, 2019
What Amount Will

question 17

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 amount will be recorded as the value of the forward contract on October 31, 2019 (year-end) if the forward contract is recorded using the net method?

• A) A liability of CDN$4,500
• B) An asset of CDN$4,500
• C) An asset of CDN$6,000
• D) Nil

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Definitions:

Inventory Increase

This occurs when there is a rise in the quantity or value of goods held by a company, signaling a buildup of stock.

Amortization of Patents

The systematic reduction of the financial value of a patent over its useful life, reflecting its consumption and obsolescence.

Gain on Sale

An increase in funds resulting from selling an asset for more than its carrying amount on the balance sheet.

Decrease in Inventories

A reduction in the quantity or value of the inventory on hand, which may result from sales, usage, spoilage, or obsolescence.