Question
On March 1, Derby Corporation (A U.S. based company) expects to order merchandise from a supplier in Norway in three months. On March 1, when
On March 1, Derby Corporation (A U.S. based company) expects to order merchandise from a supplier in Norway in three months. On March 1, when the spot rate is $0.10 per Norwegian krone, Derby enters into a forward contract to purchase 500,000 Norwegian kroner at a three-month forward rate of $0.12. Forward points are excluded in assessing the forward contracts effectiveness as a hedge and are amortized to net income on a straight-line basis. At the end of three months, when the spot rate is $0.115 per Norwegian krone, Derby orders and receives the merchandise, paying 500,000 kroner. The merchandise is sold within 30 days. What amount(s) does Derby report in net income as a result of the cash flow hedge of a forecasted transaction and the related purchase and sale of merchandise?
A. Cost of goods sold of $60,000
B. Cost of goods sold of $57,000 plus foreign exchange loss of $2,500
C. Cost of goods sold of $50,000 plus foreign exchange loss of $10,000
D. Cost of goods sold of $60,000 less foreign exchange gain of $10,000
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