On November 1, 20X5, Davis signed a contract to purchase equipment from a foreign company for 200,000 francs. The equipment was delivered to Davis on December 1 withpayment due in 90 days on March 1, 20X6. On November 1, 20X5, Davis Company entered into a 120-day forward contract to purchase 200,000 francs. The forward contract wasdesignated as a fair value hedge of a firm commitment. The relevant exchange rates are as follows:DateNovember 1, 20X5December 1, 20X5December 31, 20X5March 1, 20X6Spot RateO $3,000 lossO $2,000 lossO $4,000 gainO $1,000 gain$0.85$0.90$0.93$0.99Forward Rate(to March 1, 20X6)$0.88$0.92$0.97What amount of foreign currency transaction gain or loss would Davis report on its income statement for year 20X5?OC

To determine the foreign currency transaction gain or loss for Davis in year 20X5, you need to compare the spot rate on the transaction date (November 1, 20X5) with the spot rate on the payment due date (March 1, 20X6).1. Spot Rate on November 1, 20X5: $0.852. Spot Rate on March 1, 20X6: $0.99The difference in spot rates is $0.99 - $0.85 = $0.14.Since Davis is purchasing foreign currency, the change in rates results in a gain for Davis. Therefore, the foreign currency transaction gain would be $200,000 (in francs)$0.14 = $28,000.Now, let's consider the forward contract:1. Forward Rate on November 1, 20X5: $0.882. Spot Rate on March 1, 20X6: $0.99The difference in rates is $0.99 - $0.88 = $0.11.Again, since Davis is purchasing foreign currency, the change in rates results in a gain for Davis. Therefore, the forward contract gain would be $200,000 ( francs) * $0.11 = $22,000.Now, add the gains from the spot rate and the forward contract:$28,000 (spot rate gain) + $22,000 (forward contract gain) = $50,000.Therefore, the correct answer is:C. $4,000 gain.

Answered: What amount of foreign currency…

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What amount of foreign currency transaction gain or loss would Davis report on its income statement for year 20X5? $3,000 loss O $2,000 loss $4,000 gain $1,000 gain

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Question

On November 1, 20X5, Davis signed a contract to purchase equipment from a foreign company for 200,000 francs. The equipment was delivered to Davis on December 1 with
payment due in 90 days on March 1, 20X6. On November 1, 20X5, Davis Company entered into a 120-day forward contract to purchase 200,000 francs. The forward contract was
designated as a fair value hedge of a firm commitment. The relevant exchange rates are as follows:
Date
November 1, 20X5
December 1, 20X5
December 31, 20X5
March 1, 20X6
Spot Rate
O $3,000 loss
O $2,000 loss
O $4,000 gain
O $1,000 gain
$0.85
$0.90
$0.93
$0.99
Forward Rate
(to March 1, 20X6)
$0.88
$0.92
$0.97
What amount of foreign currency transaction gain or loss would Davis report on its income statement for year 20X5?
OC

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