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On December 1, 20X1, Micro World Incorporated entered into a 120-day forward contract to purchase 170,000 Australian dollars (A$). Micro World's fiscal year ends on December 31. The direct exchange rates follow:

On December 1, 20X1, Micro World Incorporated entered into a 120-day forward contract to purchase 170,000 Australian dollars (A$). Micro World's fiscal year ends on December 31. The direct exchange rates follow:

FINANCIAL ACCOUNTING
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 December 1, 20X1, Micro World Incorporated entered into a 120-day forward contract to purchase 170,000 Australian dollars (A$). Micro World's fiscal year ends on December 31. The direct exchange rates follow: Date December 1, 20X1 December 31, 20X1 January 30, 20X2 March 31, 20X2 Spot Rate $0.600 $0.610 $0.608 $0.602 Forward Rate (to March 31, 20X2) $0.609 $0.612 $0.605 The forward contract was to hedge an anticipated purchase of furniture on January 30. The purchase took place on January 30 with payment due on March 31, 20X2. The derivative is designated as a cash flow hedge. The company uses the forward exchange rate to measure hedge effectiveness. Which of the following is true of the journal entry recorded to adjust the foreign currency receivable on December 31, 20X1 on Micro World's books? Debit Other Comprehensive Income for $1,190. O Debit Foreign Currency Receivable from Exchange Broker (A$) for $510. O Debit Foreign Currency Transaction Gain for $510. O Credit Foreign Currency Transaction Gain for $510.
Transcribed Image Text:On December 1, 20X1, Micro World Incorporated entered into a 120-day forward contract to purchase 170,000 Australian dollars (A$). Micro World's fiscal year ends on December 31. The direct exchange rates follow: Date December 1, 20X1 December 31, 20X1 January 30, 20X2 March 31, 20X2 Spot Rate $0.600 $0.610 $0.608 $0.602 Forward Rate (to March 31, 20X2) $0.609 $0.612 $0.605 The forward contract was to hedge an anticipated purchase of furniture on January 30. The purchase took place on January 30 with payment due on March 31, 20X2. The derivative is designated as a cash flow hedge. The company uses the forward exchange rate to measure hedge effectiveness. Which of the following is true of the journal entry recorded to adjust the foreign currency receivable on December 31, 20X1 on Micro World's books? Debit Other Comprehensive Income for $1,190. O Debit Foreign Currency Receivable from Exchange Broker (A$) for $510. O Debit Foreign Currency Transaction Gain for $510. O Credit Foreign Currency Transaction Gain for $510.
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