Question

QUESTION 1 20 points Save Answer On December 1, Year 1, Tackett Company (a U.S.-based company) entered into a three-month forward contract to purchase 1 million Mexican pesos on March 1, Year 2. The following U.S. dollar-peso exchange rates apply. ----------- -------------- Forward Rate Date Spot Rate (to March 1, Y2), EEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEE - 1 IEEE $0.09 $0.07 11 December 1, Y1 $0.09 December 31, Y1 $0.08 March 1, Y1 $0.08 - - -EEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEE 11 - - LEEEE=============------------ Tackett's incremental borrowing rate is 11 percent APR. Is this forward contract a hedge or speculative for accounting purposes? Please type 'hedge' or 'speculative' with no caps. Should this forward contract be reported as an asset or a liability on the balance sheet at 12/31/1? No caps in your answer. At what amount should this asset or liability be reported? Round your answer to the nearest whole dollar. Do not use a dollar sign in your answer.

Answer 1

Particulars	Answer		Remarks
Is this forward contract a hedge or speulative for accounting purposes	Hedge		As it is hedging the risk, the same will be a hedge
Should this forward contract be reported as an asset or liability	Liability		As it is purchasing the foreign exchange, it will hit liability account
At what amount this asset or liability is recorded	0.087525	million $
Working note
Forward Price
Spot rate - Cost of carry
(1million*0.09)-11%*(1million*0.09)*3/12	0.087525