Question

On November 1, 2015, Fortune Company (a U.S.-based company) entered into a five-month forward contract to buy 800,000 Mexican pesos on March 31, 2016.  The following U.S. dollar per peso exchange rates apply:                                                                                                                    Forward Rate Date                                                                         Spot Rate                  (to 03-01-2016) November 1, 2015 …………………                    $0.052                               $0.047 December 31, 2015 ……………….                      0.045                                 0.057 March 31, 2016 ………………………                     0.048                                          The present value factor corresponding to the company’s incremental borrowing rate for time period involved is 0.9706

Question #11:  Forward contract to buy foreign currency at a future date Required:  How and in what amount should Fortune Company classify/report the forward contract on its December 31, 2015 balance sheet?

Please show your work:

Answer 1

Note: Alignment of question is not proper, Please replace rates used in answer if not found correct.

Ans: Company should classify such transaction in its December 31, 2015 Balance sheet as liability. because as soon company entered in to a forward contract to buy 800,000 Mexican pesos. it comes under an obligation to pay USD for such 800,000 Mexican pesos and the same arise before reporting date (i.e. Balance Sheet reporting date). Hence this has to be shown as current liability.

Calculation for reporting amount: this calculation can only be done based on assumptions, if the company need to purchase 800,000 Mexican pesos to pay for some obligation. in such case only a forward contract to purchase 800,000 Mexican pesos is sufficient. in such a case reporting amount would be

Forward Contract rate (March 31, 2016) 1 Mexican pesos = $0.048

Then amount of liability = 800,000*0.048

= $38,400

Net of Time Value of Money = $38,400*0.9706

= $37,271.04

Reporting amount would be $37,271.40

as per expert opinion, some legislation insist to book exchange difference at reporting date in such a case company need to report amount as follows:

Spot rate (December 31, 2016) 1 Mexican pesos = $0.057

800,000 Mexican pesos at Spot rate as at December 31, 2016 = 800,000*0.057

= $45,600

Exchange Difference = 45,600-38,400

= $7,200

Fictitious gain on exchange difference should be taken in Income statement and current liability should be taken as $45,600