Question

5. On December 1, 2018, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on February 1, 2019. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2018. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow:

Date	Spot Rate			Option Premium
December 1, 2018	$	0.97		$	0.05
December 31, 2018	$	0.95		$	0.04
February 1, 2019	$	0.94		$	0.03

Compute the fair value of the foreign currency option at December 1, 2018.

A) $7,500.

B) $6,000.

C) $3,000.

D) $4,500.

E) $1,500.

6. Parker Corp., a U.S. company, had the following foreign currency transactions during 2018:

(1.) Purchased merchandise from a foreign supplier on July 5, 2018 for the U.S. dollar equivalent of $80,000 and paid the invoice on August 3, 2018 at the U.S. dollar equivalent of $82,000.

(2.) On October 1, 2018 borrowed the U.S. dollar equivalent of $872,000 evidenced by a non-interest-bearing note payable in euros on October 1, 2019. The U.S. dollar equivalent of the note amount was $860,000 on December 31, 2018, and $881,000 on October 1, 2019.

What amount should be included as a foreign exchange gain or loss from the two transactions for 2018?

A) $10,000 gain.

B) $14,000 loss.

C) $2,000 loss.

D) $14,000 gain.

E) $2,000 gain.

Answer 1

Answer - 5

The option A is correct : $ 7,500

Explanation

Computation the fair value of the foreign currency option at December 1, 2018.

Fair value of the foreign currency =

150,000 Canadian dollars * Option Premium

150,000 * 0.03

$ 7,500

Therefore,

Fair value of the foreign currency = $ 7,500

The option A is correct : $ 7,500

Answer-6

The correct option is B : $ 14,000 Gain

Explanation

amount should be included as a foreign exchange gain or loss from the two transactions for 2018

$80000-$82000)+($ 872000-$ 860000)

$2000+$12000

$ 14,000 Gain

Therefore,

The correct option is B : $ 14,000 Gain

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