Question

A US company anticipates that it will purchase merchandise for 100,000 at the end of August...

A US company anticipates that it will purchase merchandise for 100,000 at the end of August and pay for it at the time the merchandise is delivered. On may 1,when the spot rate is$1.20 and the forward rate for delivery on August 30 is $1.21 the company enters a forward contract to buy 100,000 on August 30. The forward contract qualifies as a cash flow hedge of the forecasted purchase. The company purchases the merchandise on August 30, when the spot rate is $1.232 and closes the forward contract and pays the supplier 100,000. the company sells the merchandise in October. the company has a December 31 year end.

On August 30 the company records the merchandise at what amount?

a. $125,400

b.$120,000

c.$121,000

d.$123,200

Business   Accounting   
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Answer #1

Amount of merchandise purchased = Spot rate on August 30 * Amount in foreign currency

                                      = 1.232 * 100000

                                      = $ 123200

Correct option is "D" - 123200

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