Company ABC operates and maintains a number of power stations and dams throughout the State. A lot of the specialised parts that are required to maintain or refurbish this plant and equipment come from overseas countries.
In order to minimise fluctuations in the exchange rates, ABC enters into hedge contracts.
Please provide the necessary journal entries and workings for the below transactions:
ABC orders a new turbine from Turbine Inc. who reside in Switzerland on 1 March, at a cost of 1,000,000 Euros, the exchange rate on this day is 0.5.
Turbine Inc. ship the Turbine on 1 April, the exchange rate on 1 April is 0.55. Turbine Inc. also issue an invoice to ABC on 1 April.
The new turbine is installed and ready for use at a ABC location on 30 April, the exchange rate on 30 April is 0.6.
On 1 March, ABC entered into a hedge contract buy 1,000,000 Euros to minimise any future foreign exchange fluctuations on the purchase of the turbine.
On 30 April, ABC paid the invoice to Turbine Inc. and closed out the hedge agreement.