Question

In: Accounting

When the merchandise is sold by the company, what is the cost of goods sold?

Use the following information on the U.S. dollar value of the euro.


Spot Rate

Forward Rate for

April 30, 2021 Delivery

October 30, 2020

$ 1.250

$ 1.254

December 31, 2020

1.258

1.256

April 30, 2021

1.260

1.260


On October 30, 2020, a U.S. company forecasts that it will purchase merchandise from an Italian supplier at the end of April 2021, in the amount of €100,000, and will pay the supplier on delivery. On October 30, the company enters a forward contract to buy €100,000 on April 30, 2021 and classifies it as a cash flow hedge of the forecasted purchase. On April 30, 2021, the company receives the merchandise, closes the forward contract and pays the supplier. The company's accounting year ends December 31.

When the merchandise is sold by the company, what is the cost of goods sold?


A.

$125,000


B.

$126,600


C.

$125,400


D.

$126,000

Solutions

Expert Solution

On the date oct 30,2021 forward contract

Forward rate : $ 1.254

€100,000 = $125400

On dec 31,2020 ,forward rate 1.256

€100,000 = $ 125600

Net gain = 125600 -125400

= $ 200 other compensive income

On purchase date = the cost of purchase d cost of good sold is

30 april 2021 = $ 1.260

€100,000 = 126000


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