Question
In: Accounting
How will the company report the forward contract on its December 31,2019 balance sheet?
On November 16,2019, a US company makes a sale to a customer in Germany. Under the sale terms, the customer will pay the company 100,000 euro on March 16. On November 16, the company also enters a forward contract to sell 100,000 euro on March 16, 2020. On March 16, the company receives 100,000 euro from the customer and sells it using the forward contract. The companys accounting year ends December 31. Rates on the dates specified appear below:
| Date | Spot Rate | Forward Rate for March 16 2020 Delivery | ||||
| November 16,2019 | $ | 1.250 | $ | 1.248 | ||
| December 31, 2019 | 1.260 | 1.255 | ||||
| March 16,2020 | 1.265 | 1.265 | ||||
How will the company report the forward contract on its December 31, 2019 balance sheet?
a. $500 liability
b. $700 asset
c. $700 liability
d. $500 asset
Solutions
Expert Solution
Company has entered Forward Contract to sell 100,000 Euro
Forward Rate for March 16 2020 Delivery on November 16, 2019 = $1.248
Forward Rate for March 16 2020 Delivery on December 31, 2019= $1.255
The Forward Rate for March 16 2020 Delivery on December 31, 2019 is greater than Forward Rate for March 16 2020 Delivery on November 16, 2019.
So the company will repor the forward contract on its December 31,2019 balance sheet as Asset as follows
= ($1.255 - $1.248) * 100,000
= $0.007 * 100,000
= $700 asset
Hence, the answer is b. $700 asset
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