Question

On April 15, Year 5, Bailey Inc. negotiated a large sale of their premium maple syrup to Sweet Co. for US$3,000,000. The contract required payment in three years from the date of delivery of the goods Bailey delivered the goods on July 15 Year 5. The company has a December 31 year-end The exchange rates at various dates are given below. April 15, Year 5 July 15, Year 5 December 31, Year 5 Spot rates US$1 = CON$1.28 US$1 - CON$1.30 US$1 = CON$1.42 Forward rates US$1 - CON$1.22 US$1 - CON$1.20 US$1 - CON$1.25 Assuming the transaction is not hedged, which of the following amounts will be used to record the receivable in Bailey's books at July 15, Year 5? Multiple Choice 0 $4.260,000

Answer 1

As the transaction is not hedged, It will be recorded at Spot rate i.e, US$1 = CDN$1.30 Amount of receivables on July 15, Year 5 will be $ 30,00,000 x 1.30 = $ 39,00,000 Hence, Second Option $3,900,000 is correct Note: Forward rate are used in case the transactions are hedged

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