Brandt Corp. (a U.S.-based company) sold parts to a South Korean customer on December 1, 2020, with payment of 10 million South Korean won to be received on March 31, 2021. The following exchange rates apply: Date Spot Rate Forward Rate (to March 31, 2021) December 1, 2020 $ 0.0035 $ 0.0034 December 31, 2020 0.0033 0.0032 March 31, 2021 0.0038 N/A 1. Assuming that Brandt did not hedge his foreign exchange risk, how much foreign exchange gain or loss should it report on its 2020 income statement with regard to this transaction? a. 3000 gain b. 2000 loss c. 5000 gain d. 1000 loss 2. Assuming that Brandt entered into a forward contract to sell 10 million South Korean won on December 1, 2020, as a fair value hedge of a foreign currency receivable, what is the net impact on its net income in 2020 resulting from a fluctuation in the value of the won? Brandt amortizes forward points on a monthly basis using a straight-line method. Ignore present values. Multiple Choice $2,000 increase in net income $100 decrease in net income $250 decrease in net income No impact on net income
Brandt Corp. (a U.S.-based company) sold parts to a South Korean customer on December 1, 2020, with payment of 10 million South Korean won to be received on March 31, 2021. The following exchange rates apply:
| Date | Spot Rate | Forward Rate (to March 31, 2021) |
||||
| December 1, 2020 | $ | 0.0035 | $ | 0.0034 | ||
| December 31, 2020 | 0.0033 | 0.0032 | ||||
| March 31, 2021 | 0.0038 | N/A | ||||
1. Assuming that Brandt did not hedge his foreign exchange risk, how much foreign exchange gain or loss should it report on its 2020 income statement with regard to this transaction?
a. 3000 gain
b. 2000 loss
c. 5000 gain
d. 1000 loss
2. Assuming that Brandt entered into a forward contract to sell 10 million South Korean won on December 1, 2020, as a fair value hedge of a foreign currency receivable, what is the net impact on its net income in 2020 resulting from a fluctuation in the value of the won? Brandt amortizes forward points on a monthly basis using a straight-line method. Ignore present values.
-
$2,000 increase in net income
-
$100 decrease in net income
-
$250 decrease in net income
-
No impact on net income
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