St. Philip Company ordered parts costing €100,000 from a foreign supplier on January 15 when the spot rate was $0.20 per €. A one-month forward contract was signed on that date to purchase €100,000 at a forward rate of $0.23. The forward contract is properly designated as a fair value hedge of the €100,000 firm commitment. On February 15, when the company receives the parts, the spot rate is $0.22. At what amount should St. Philip Company carry the parts inventory on its books?a. $20,000b. $21,000c. $22,000d. $23,000

St. Philip Company ordered parts costing €100,000 from a foreign supplier on January 15 when the spot rate was $0.20 per €. A one-month forward contract was signed on that date to purchase €100,000 at a forward rate of $0.23. The forward contract is properly designated as a fair value hedge of the €100,000 firm commitment. On February 15, when the company receives the parts, the spot rate is $0.22. At what amount should St. Philip Company carry the parts inventory on its books?a. $20,000b. $21,000c. $22,000d. $23,000

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter9: Operating Activities

Section: Chapter Questions

Problem 22PC

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Choose the correct. St. Philip Company ordered parts costing €100,000 from a foreign supplier on January 15 when the spot rate was $0.20 per €. A one-month forward contract was signed on that date to purchase €100,000 at a forward rate of $0.23. The forward contract is properly designated as a fair value hedge of the €100,000 firm commitment. On February 15, when the company receives the parts, the spot rate is $0.22. At what amount should St. Philip Company carry the parts inventory on its books?a. $20,000b. $21,000c. $22,000d. $23,000
On June 1, 2017, Micro Corp. received an order for parts from a Mexican customer at a price of 1,000,000 Mexican pesos with a delivery date of July 31, 2017. On June 1, when the U.S. dollar–Mexican peso spot rate is $0.115, Micro Corp. entered into a two month forward contract to sell 1,000,000 pesos at a forward rate of $0.12 per peso. Micro designates the forward contract as a fair value hedge of the firm commitment to receive pesos, and the fair value of the firm commitment is measured by referring to changes in the peso forward rate. Micro delivers the parts and receives payment on July 31, 2017, when the peso spot rate is $0.118. On June 30, 2017, the Mexican peso spot rate is $0.123, and the forward contract has a fair value of $2,400. What is the net impact on Micro’s net income for the quarter ended June 30, 2017, as a result of this forward contract hedge of a firm commitment?a. $–0–.b. $2,400 increase in net income.c. $4,000 decrease in net income.d. $8,000 increase in net…
On June 1, 2017, Micro Corp. received an order for parts from a Mexican customer at a price of 1,000,000 Mexican pesos with a delivery date of July 31, 2017. On June 1, when the U.S. dollar–Mexican peso spot rate is $0.115, Micro Corp. entered into a two month forward contract to sell 1,000,000 pesos at a forward rate of $0.12 per peso. Micro designates the forward contract as a fair value hedge of the firm commitment to receive pesos, and the fair value of the firm commitment is measured by referring to changes in the peso forward rate. Micro delivers the parts and receives payment on July 31, 2017, when the peso spot rate is $0.118. On June 30, 2017, the Mexican peso spot rate is $0.123, and the forward contract has a fair value of $2,400.What is the net impact on Micro’s net income for the quarter ended September 30, 2017, as a result of this forward contract hedge of a firm commitment? Choose the correct.a. $–0–.b. $115,000 increase in net income.c. $118,000 increase in net…
On June 1, 2017, Micro Corp. received an order for parts from a Mexican customer at a price of 1,000,000 Mexican pesos with a delivery date of July 31, 2017. On June 1, when the U.S. dollar–Mexican peso spot rate is $0.115, Micro Corp. entered into a two month forward contract to sell 1,000,000 pesos at a forward rate of $0.12 per peso. Micro designates the forward contract as a fair value hedge of the firm commitment to receive pesos, and the fair value of the firm commitment is measured by referring to changes in the peso forward rate. Micro delivers the parts and receives payment on July 31, 2017, when the peso spot rate is $0.118. On June 30, 2017, the Mexican peso spot rate is $0.123, and the forward contract has a fair value of $2,400.What is Micro’s net increase or decrease in cash flow from having entered into this forward contract hedge? Choose the correct.a. $–0–.b. $1,000 increase in cash flow.c. $1,500 decrease in cash flow.d. $2,000 increase in cash flow.
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Based on past experience, Maas Corp. (a U.S.-based company) expects to purchase raw materials from a foreign supplier at a cost of 1,200,000 francs on March 15, 2021. To hedge this forecasted transaction, on December 15, 2020, the company acquires a call option to purchase 1,200,000 francs in three months. Maas selects a strike price of $0.68 per franc when the spot rate is $0.68 and pays a premium of $0.005 per franc. The spot rate increases to $0.686 at December 31, 2020, causing the fair value of the option to increase to $10,000. By March 15, 2021, when the raw materials are purchased, the spot rate has climbed to $0.70, resulting in a fair value for the option of $24,000. The raw materials are used in assembling finished products, which are sold by December 31, 2021, when Maas prepares its annual financial statements. Prepare all journal entries for the option hedge of a forecasted transaction and for the purchase of raw materials. What is the overall impact on net income over…