Question
On November 1, 20x1 Sally, Inc., a U.S. corporation, purchased inventory from a Turkish company for 3,000,000 Turkish Lira, payable in 3 months.The relevant exchange
On November 1, 20x1 Sally, Inc., a U.S. corporation, purchased inventory from a Turkish company for 3,000,000 Turkish Lira, payable in 3 months.The relevant exchange rates between the U.S. and Turkish currencies are as follows:
Spot rateForward rate (for 2/1/20x2 settlement)
November 1,20x1$0.348$0.348
December 31,20x1$0.359$0.352
February 1, 20x2 $0.344
If Sally does not attempt to hedge this transaction, what is the gain or loss that should be shown on the company's December 31, 20x1 financial statements?
A. $33,000 loss
B. $21,000 loss
C. $11,700 gain
D. $12,000 gain
Using the same data as in the prior question,assume that on November 1, 20x1 Sally Company enters a forward contract to buy 3,000,000 Turkish Lira on February 1, 20x2.How should Sally report the forward contract on December 31, 20x1?
A. $12,000 liability
B. $12,000 asset
C. $11,700 liability
D. $33,000 asset
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