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:
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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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