On December 1, 2011, Barnum Company (a U.S.-based company) entered into a three-month forward contract to purchase 1,000,000 ringgits on March 1, 2012. The following U.S. dollar per ringgit exchange rates apply:
Date | Spot Rate | Forward Rate (to March 1, 2012) |
December 1, 2011 | $0.044 | $0.042 |
December 31, 2011 | 0.040 | 0.037 |
March 1, 2012 | 0.038 | N/A |
Barnum's incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent (1 percent per month) is 0.9803.
Which of the following correctly describes the manner in which Barnum Company will report the forward contract on its December 31, 2011, balance sheet?
a. As an asset in the amount of $1,960.60.
b. As an asset in the amount of $3,921.20.
c. As a liability in the amount of $6,862.10.
d. As a liability in the amount of $4,901.50.
Use the following information for Problems 11 and 12.
MNC Corp. (a U.S.-based company) sold parts to a South Korean customer on December 1, 2011, with payment of 10 million South Korean won to be received on March 31, 2012. The following exchange rates apply:
Date | Spot Rate | Forward Rate (to March 31, 2012) |
December 1, 2011 | $0.0035 | $0.0034 |
December 31, 2011 | 0.0033 | 0.0032 |
March 31, 2012 | 0.0038 | N/A |
MNC's incremental borrowing rate is 12 percent. The present value factor for three months at an annual interest rate of 12 percent (1 percent per month) is 0.9706.
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