Use the following data for questions 7 and 8:

On November 2, Year 5, a company purchased a machine for 200,000 Swiss francs with payment required on March 1, Year 6. To eliminate the risk on foreign exchange losses on this payable, the company entered into a forward exchange contract on December 1 ,Year 5, to receive SF200,000 at a forward rate of SF1=$1.10 on March 1 ,Year 6. Hedge accounting is not applied. The spot rate was SF1=$1.05 on November 2, Year 5, and SF1=$1.07 on December 1, Year 5.

7. What is the amount of the premium or discount on the forward exchange contract?

a) Discount of $ 6,000

b) Discount of $10,000

c) Premium of $ 6,000

d) Premium of $ 10,000

8. How should the premium or discount on the forward exchange contract be accounted for?

a) It should be expensed at the inception date of the forward exchange contract.

b) It should be expensed on the maturity date of the forward exchange contract.

c) It should be expensed over the three- month term of the forward exchange contract.

d) It should be added to the cost of the machine.