Question

Excelsior Builders, a U.S. Based Corporation ordered a machine from a London Manufacturing Company on January 15, 2020 costing 100,000 Pounds Sterling when the spot rate was $1.20 per Pound. A one month forward contract was signed on that date to purchase 100,000 Pounds Sterling at a forward rate of $1.23 per Pound. The forward contract is properly designated as a fair value hedge of the 100,000 Pounds Sterling firm commitment for the machine. Excelsior receives the machine on February 15 and at that time the spot rate is $1.22. At what amount should Excelsior capitalize this asset on its books? Defend your answer.

There is no more information, this is the full question from Advanced Accounting

Answer 1

Currency Forwards are contracts where the investor is obligated to buy/sell the underlying currency at a point in future at a fixed rate determined at the time of entering into the contract. At maturity the spot rate may be different then the forward rate and accordingly, the investor may be at a profit or a loss.

In the question, 100,000 pounds stering will be needed by the US Corporation. which means the US Corporation will purcahse and since it is a forward contract, theinvestor is obliged to purcahse it at the forward rate agreed in the contract. The amount at which the asset sould be capitalized is 100,000 * 1.23 = $123,000