Question

Use the information on the U.S. dollar value of the pound sterling to answer the following question(s).

	Spot Rate	Forward Rate for August 16, 2020 Delivery
May 16, 2020	$1.380	$1.375
June 30, 2020	1.390	1.388
August 16, 2020	1.400	1.400

On May 16, 2020, a U.S. company takes delivery of £100,000 in merchandise from a U.K. supplier. The company will pay the supplier £100,000 on August 16. On May 16, the company also enters a forward contract to buy £100,000 on August 16, 2020. On August 16, the company purchases £100,000 using the forward contract, and pays the supplier. The company's accounting year ends June 30, and it sells the merchandise in September 2020.

At what amount will the company report cost of goods sold for the sale of the merchandise in fiscal 2021?

	A.	$139,000
	B.	$137,500
	C.	$140,000
	D.	$138,000

Answer 1

Ans:

In the Fiscal year 2021, company will report its cost of good sold at the spot price at which the goods are actually purchased.

As company has entered into forward rate to hedge the fluctuation actual amount to be paid. Any gain or loss from foriegn exchange transaction will be considered as gian or loss seprately in the year of transaction.

Purachse/Inventory are to be recorded at the spot rate on the date of Purchase.

So value of Cost of Goods Sold will be:

Euro 100,000 * $1.380 = $138,000

Correct answer is option D.

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