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I am having trouble with these kind of questions:

On December 12, year 1, Imp Co. entered into three forward exchange contracts, each to purchase 100,000 euros in ninety days. The relevant exchange rates are as follows:

Spot rate, Forward rate (for March 12, year 2)

November 30, year 1 $.87 $.89

December 12, year 1 .88 .90

December 31,year 1 .92 .93 38.

Imp entered into the first forward contract to hedge a purchase of inventory in November year 1, payable in March year 2. At December 31, year 1, what amount of foreign currency transaction gain from this forward contract should Imp include in net income?

a. $0

b. $ 3,000

c. $ 5,000

d. $10,000

I am assuming we use forward rate because its a forward contract right? And if it doesn’t say that, we use the spot rate?

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anyone?

[Anonymous]

I'm pretty sure you use the forward exchange rate just like you said. I know if this was just the spot rate you would use that spot rate and mark it to market. I believe you do the same with forwards. I would say the answer is B $3,000, what does it say the answer is?

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Forgot to post the answer, but yes it is B!

So for this question (same scenario)

39. At December 31, year 1, what amount of foreign currency transaction loss should Imp include in income from the revaluation of the Accounts Payable of 100,000 euros incurred as a result of the purchase of inventory at November 30, year 1, payable in March year 2?

a. $0

b. $3,000

c. $4,000

d. $5,000

So this is talking about the actual loss, not the forward hedging, so we use the spot rate and since its reported into earnings and its “realized”, you do .92 – .87, right?

[Anonymous]

Yep! It sounds like you've got it

[Author]

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