Question

On November 16, 2019, a U.S. company makes a sale to a customer in Germany. Under the sale terms, the customer will pay the company €100,000 on March 16. On November 16, the company also enters a forward contract to sell €100,000 on March 16, 2020. On March 16, the company receives €100,000 from the customer and sells it using the forward contract. The company's accounting year ends December 31. Rates on the dates specified appear below:

	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

What is the net effect on 2019 income of exchange rate changes due to the sale and the forward contract?

	A.	no effect
	B.	$1,700 net gain
	C.	$300 net loss
	D.	$300 net gain

Answer 1

Association 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 more important than Forward Rate for March 16 2020 Delivery on November 16, 2019.

So the association will repor the forward concurrence on its December 31,2019 bookkeeping report as Asset as follows

= ($1.255 - $1.248) * 100,000

= $0.007 * 100,000

= $700 resource

In this way, the proper reaction is A. $700 resource