Question
Part A) On November 1, 2018, our company sells to a retailer located in Spain 10,000 units of a product at a sales price of
Part A)
On November 1, 2018, our company sells to a retailer located in Spain 10,000 units of a product at a sales price of 20 per unit, and we require payment in Euros (). The exchange rate on the date of sale is $1.24:1.The due date for payment is February 1, 2019. To mitigate the risk of exchange rate fluctuations between the sale date and the collection date, on November 1, 2018, our company enters into a forward contract with an exchange broker. The contract obligates our company to deliver 200,000 on February 1, 2019, while we lock in the $US we will receive on that date at the forward rate of $1.28:1 (i.e., the forward rate on November 1, 2018 for settlement on February 1, 2019). Assume this derivative qualifies as a fair value hedge.The following table includes the spot rates and forward rates on November 1, 2018, December 31, 2018, and February 1, 2019: Our companys functional currency and reporting currency is the $US. When computing fair values, ignore discounting.
Date | Spot Rate ($US = 1) | Forward Ratea ($US = 1) |
---|---|---|
November 1, 2018 | 1.24 | 1.28 |
December 31, 2018 | 1.35 | 1.36 |
February 1, 2019 | 1.39 | 1.39 |
aFor a settlement on February 1, 2019
The adjustment of the Euro-denominated accounts receivable at December 31, 2018, will include which of the following debit or credit amounts?
Select one:
a. $270,000 debit to Accounts receivable (200,000)
b. $272,000 credit to Sales
c. $22,000 debit to Accounts receivable (200,000)
d. $16,000 debit to Sales
Part B)
On November 1, 2018, our company sells to a retailer located in Spain 10,000 units of a product at a sales price of 20 per unit, and we require payment in Euros (). The exchange rate on the date of sale is $1.24:1.The due date for payment is February 1, 2019. To mitigate the risk of exchange rate fluctuations between the sale date and the collection date, on November 1, 2018, our company enters into a forward contract with an exchange broker. The contract obligates our company to deliver 200,000 on February 1, 2019, while we lock in the $US we will receive on that date at the forward rate of $1.28:1 (i.e., the forward rate on November 1, 2018 for settlement on February 1, 2019). Assume this derivative qualifies as a fair value hedge.The following table includes the spot rates and forward rates on November 1, 2018, December 31, 2018, and February 1, 2019: Our companys functional currency and reporting currency is the $US. When computing fair values, ignore discounting.
Date | Spot Rate ($US = 1) | Forward Ratea ($US = 1) |
---|---|---|
November 1, 2018 | 1.24 | 1.28 |
December 31, 2018 | 1.35 | 1.36 |
February 1, 2019 | 1.39 | 1.39 |
aFor a settlement on February 1, 2019
The adjustment of the foreign currency forward contract at December 31, 2018, will include which of the following debit or credit amounts?
Select one:
a. $272,000 credit to Forward contract (asset or liability)
b. $22,000 credit to Forward contract (asset or liability)
c. $16,000 debit to Forward contract (asset or liability)
d. $16,000 debit to Sales
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