[The following information applies to the questions displayed below.]Select the correct answer for each of the following questions.Note: Items 3 through 5 are based on the following:On December 12, 20X5, Dahl Company entered into three forward exchange contracts, each to purchase 100,000 francs in 90 days. The relevant exchange rates are as follows: Spot RateForward Rate for March 12, 20X6December 12, 20X5$ 0.88$ 0.90December 31, 20X50.980.93 2. On September 1, 20X5, Johnson Incorporated entered into a foreign exchange contract for speculative purposes by purchasing €50,000 for delivery in 60 days. The rates to exchange U.S. dollars for euros follow: 9/1/X59/30/X5Spot rates$ 0.75$ 0.7030-day forward rate0.730.7260-day forward rate0.740.73In its September 30, 20X5, income statement, what amount should Johnson report as foreign exchange loss?multiple choice$2,500$500$1,500$1,000

The objective of the question is to calculate the foreign exchange loss that Johnson Incorporated should report in its income statement for the period ending September 30, 20X5. This involves understanding how foreign exchange contracts work and how changes in exchange rates affect the value of such contracts.Johnson Incorporated entered into a foreign exchange contract on September 1, 20X5, to purchase €50,000 at a 60-day forward rate of $0.74 per euro. This means that Johnson has agreed to pay a total of €50,000 * $0.74 = $37,000 for the euros in 60 days.However, by September 30, 20X5, the 30-day forward rate (which is now the relevant rate for the contract, as 30 days have passed since the contract was entered into) has decreased to $0.72 per euro. This means that if Johnson were to enter into the same contract on September 30, it would only agree to pay €50,000 * $0.72 = $36,000 for the euros.The difference between the amount Johnson originally agreed to pay and the amount it would agree to pay based on the September 30 exchange rate represents a foreign exchange loss. This loss is calculated as $37,000 - $36,000 = $1,000.Johnson Incorporated should report a foreign exchange loss of $1,000 in its income statement for the period ending September 30, 20X5. This loss arises from the decrease in the exchange rate from $0.74 per euro when the foreign exchange contract was entered into, to $0.72 per euro 30 days later.

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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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[The following information applies to the questions displayed below.]

Select the correct answer for each of the following questions.

Note: Items 3 through 5 are based on the following:

On December 12, 20X5, Dahl Company entered into three forward exchange contracts, each to purchase 100,000 francs in 90 days. The relevant exchange rates are as follows:

	Spot Rate	Forward Rate for March 12, 20X6
December 12, 20X5	$ 0.88	$ 0.90
December 31, 20X5	0.98	0.93

2. On September 1, 20X5, Johnson Incorporated entered into a foreign exchange contract for speculative purposes by purchasing €50,000 for delivery in 60 days. The rates to exchange U.S. dollars for euros follow: