On October 1, 2013, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2014, at a price of 100,000 British pounds. On October 1, 2013, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2013, the option has a fair value of $1,600. The following spot exchange rates apply: $\begin{array}{|l|c|}
\hline \text { Date } & \text { Spot Rate } \
\hline \text { October 1, 2013 } & \$ 2.00 \
\hline \text { December 31,2013 } & \$ 1.97 \
\hline \text { February 1,2014 } & \$ 2.01 \
\hline
\end{array}$ What is the amount of Cost of Goods Sold for 2014 as a result of these transactions?
A)$200,000.
B)$195,000.
C)$201,000.
D)$202,600.
E)$203,000.

Question

Quizplus · Accepted Answer

The cost of goods sold is calculated using the spot rate on the date of the purchase (February 1, 2014) which is $2.01 per pound. Therefore, 100,000 pounds x $2.01 = $201,000.

On October 1, 2013, Eagle Company Forecasts the Purchase of Inventory