Chapter 9, Problem 13P

On March 1, Pimlico Corporation (a U.S.-based company) expects to order merchandise from a supplier in Sweden in three months. On March 1, when the spot rate is $0.10 per Swedish krona, Pimlico enters into a forward contract to purchase 500,000 Swedish kroner at a three-month forward rate of $0.12. At the end of three months, when the spot rate is $0.115 per Swedish krona, Pimlico orders and receives the merchandise, paying 500,000 kroner. What amount does Pimlico report in net income as a result of this cash flow hedge of a forecasted transaction?

1. a. $10,000 premium expense plus a $7,500 positive adjustment to net income when the merchandise is purchased.
2. b. $10,000 Discount expense plus a $5,000 positive adjustment to net income when the merchandise is purchased.
3. c. $2,500 premium expense plus a $5,000 negative adjustment to net income when the merchandise is purchased.
4. d. $2,500 premium expense plus a $2,500 positive adjustment to net income when the merchandise is purchased.