On 11/1/2020, an American firm purchased an inventory costing 100,000 Canadian Dollars from a Canadian firm to be paid for on 2/1/2020. Also on 11/1/2020, the American firm entered into a forward contract to purchase 100,000 Canadian dollars for delivery on 2/1/2020. The exchange rates were as follows: Spot Forward 11/1/2020 1 CD = $0.73 1 CD = $0.74 12/31/2020 1 CD = $0.75 1 CD = $0.76 2/1/2021 1 CD = $0.79 1 CD = $0.79 The American firm's fiscal year-end is 12/31. The changes in the value of the forward contract should be discounted at 12%. 1. What is the beginning balance (as of 1/1/2021) of accounts payable to the Canadian firm? a. 79,000 b. 75,000 c. 0 d. 73,000 2. What is the balance on the settlement date (2/1/2021) of inventory purchased from the Canadian firm? a. 73,000 b. 75,000 c. 0 d. 79,000 3. How much is the total income effect of the foreign transaction (purchase of inventory) with the forward contract? a. 6,000 loss b. 1,000 loss c. 2,000 gain d. 5,000 gain

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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On 11/1/2020, an American firm purchased an inventory costing 100,000 Canadian Dollars from a Canadian firm to be paid for on 2/1/2020. Also on 11/1/2020, the American firm entered into a forward contract to purchase 100,000 Canadian dollars for delivery on 2/1/2020. The exchange rates were as follows:

Spot Forward

11/1/2020 1 CD = $0.73 1 CD = $0.74

12/31/2020 1 CD = $0.75 1 CD = $0.76

2/1/2021 1 CD = $0.79 1 CD = $0.79

The American firm's fiscal year-end is 12/31. The changes in the value of the forward contract should be discounted at 12%.

1. What is the beginning balance (as of 1/1/2021) of accounts payable to the Canadian firm?

a. 79,000

b. 75,000

c. 0

d. 73,000

2. What is the balance on the settlement date (2/1/2021) of inventory purchased from the Canadian firm?

a. 73,000

b. 75,000

c. 0

d. 79,000

3. How much is the total income effect of the foreign transaction (purchase of inventory) with the forward contract?

a. 6,000 loss

b. 1,000 loss

c. 2,000 gain

d. 5,000 gain

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