On November 7, 20X5, Labrador Limited signed a contract to buy equipment from a US manufacturer. The equipment was to be delivered on January 15 and paid for on February 15, 20X6. The price of the equipment was US$500,000. On the same date that Labrador signed the contract, it made a 20% deposit as part of the terms of the contract. It also immediately entered into a forward contract with the bank to buy US$400,000 on February 15, 20X6.
Labrador designated the forward contract as a hedge of the outstanding purchase commitment on the equipment. The equipment is delivered on January 15, 20X6. The exchange rates are:
Labrador paid the manufacturer and closed out the forward contract on February 15, 20X6.
Required
1. Assume the hedge was designated as a fair-value hedge. Record the journal entries to record the purchase and the related hedge for 20X5 and 20X6. Labradors fiscal year ends on December 31. Ignore amortization of the equipment.
2. Assume the hedge was designated as a cash-flow hedge. Record the journal entries to record the purchase and the related hedge for 20X5 and 20X6. Labradors fiscal year ends on December 31. Ignore amortization of the equipment.
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