You are a controller at YY Trading Ltd. YY has increased inventory purchases with Brazilian suppliers in recent years. To protect against exchange rate fluctuations, you decided to arrange a term loan in Brazilian real with your bank. On December 31, 2017, a loan of Real 1,970,000 was arranged with an interest rate of 5.25% per year. Interest is payable at the end of each year. The term loan would mature at the end of 2020. You designated this loan as a cash flow hedge of future inventory purchases.
According to your budget, you expected the following inventory purchases (in Brazilian real) in the following years:
2018- 860,000, 2019- 745,000, 2020- 365,000
Exchange rates for Brazilian real at the year-end date of the past four years were as following:
2017- 0.40710 2018- 0.35660 2019-0.33710 2020-0.26250
Your company's year-end is on December 31.
Required:
Prepare the journal entries required for 2018, 2019 and 2020 related to this cash flow hedge.