Question

Question text

Hedges of foreign-currency-denominated firm commitments

Spot and forward rates for the euro are:

	Spot rate	Forward rate for January 15, 2019 delivery
December 15, 2018	$1.290	$1.300
December 31, 2019	1.320	1.325
January 15, 2019	1.330	1.330

On December 15, 2018, a U.S. company issues a purchase order for merchandise costing €1,000,000 from suppliers in Germany. The company plans to pay the suppliers on delivery of the merchandise, scheduled for January 15, 2019. On December 15, the company enters into a forward contract for delivery of €1,000,000 on January 15, 2019. The forward contract is a qualified fair value hedge of the firm commitment to buy merchandise. The company’s accounting year ends December 31. On January 15, 2019, the company takes delivery of the merchandise, closes the forward contract, and pays the suppliers.

When the U.S. company takes delivery of the merchandise on January 15, 2019, at what amount will the inventory be reported?

Select one:

$1,330,000

$1,290,000

$1,300,000

$1,325,000

Answer 1

option c 1300000

explanation