Question

Completed Transaction, Forward Contract. On December 1, 20x8, our company shipped goods to an overseas company. The sales price was 1,000,000 FC units and the 90-day receivable was denominated in FC. As protection against FC losses, we entered into a forward exchange contract to deliver 1,000,000 FC units on March 1, 20x9, the payment date.

Date	Spot rate	60-day forward rate	90-day Forward rate
December 1, 20x8	$0.140	$0.138	$0.137
December 31, 20x8	$0.138	$.139	$.138
March 1, 20x9	$0.136	--	--

2. For the year ended December 31, 20x8, what is the income statement amount associated with the forward exchange contract (only the contract; ignore the FC receivable)?

a.   $1,961 gain.

b.   $1,961 loss.

c.   $1,980 gain.

d.   $1,980 loss.

e.   None of the above.

3.   On December 31, 20x8, the forward contract should be recorded as:

a.   Asset $1,961.

b.   Asset $1,980.

c.   Liability $1,961.

d.   Liability $1,980.

e.   None of the above.

4.   The combined income effect for 20x8 associated with both the receivable and contract is:

a.   $3,961 loss.

b.   $3,984 loss.

c.   $3,993 loss.

d.   $3,998 loss.

e.   None of the above.

5.   For 20x9, the second year, the combined income effect associated with both the receivable and the forward contract is:

a.   Gain $961.

b.   Gain $2,794.

c.   Loss $961.

d.   Loss $3,766.

e.   None of the above.

6.   For the year ended December 31, 20x9, the second year, what is the income statement amount associated with the FC receivable? (Ignore the forward contract.)

a.   $0 income/gain.

b.   $1,000 expense/loss.

c.   $1,000 income/gain.

d.   $2,000 expense/loss.

e.   $2,000 income/gain.

f.    None of the above.

Answer 1

In the question interest rate is not given.

If we know the interest rate we have to discount it to find out present value.

2. 2000 loss (139000-137000)

3. Liability 2000 (2000 above)

4. 4000 loss (140000-138000)+(139000-137000)

5. gain 1000 (139000-136000)- (138000-136000)

6. 2000 expenses (138000-136000)