Robert Company sold inventory to an Australian company for 50,000 Australian dollars on April 1,20X0 with settlement to be in 60 days.On the same date,Robert entered into a 60-day forward contract to sell 50,000 Australian dollars at a forward rate of $1.164 in order to manage its exposed foreign currency receivable.The forward contract is not designated as a hedge.The spot rates were as follows:

-Based on the preceding information,had Robert not used the forward exchange contract,what would have been the foreign currency transaction gain or loss for the year?
A)Gain of $200
B)Gain of $150
C)Loss of $350
D)Loss of $200

Question

Robert Company sold inventory to an Australian company for 50,000 Australian dollars on April 1,20X0 with settlement to be in 60 days.On the same date,Robert entered into a 60-day forward contract to sell 50,000 Australian dollars at a forward rate of $1.164 in order to manage its exposed foreign currency receivable.The forward contract is not designated as a hedge.The spot rates were as follows:
 
-Based on the preceding information,had Robert not used the forward exchange contract,what would have been the foreign currency transaction gain or loss for the year?
A)Gain of $200 
B)Gain of $150 
C)Loss of $350 
D)Loss of $200

Quizplus · Accepted Answer

If Robert had not used the forward exchange contract, they would have received 50,000 Australian dollars in 60 days, which they would need to convert to US dollars at the spot rate on that day.

On the settlement date of May 31, 20X0, the spot rate for AUD/USD was $1.17, which means that 50,000 Australian dollars would be converted to $58,500.

However, since the invoice amount for the inventory sale was only 50,000 Australian dollars, Robert would have a foreign currency transaction loss of $8,500 ($58,500 - $50,000).

Robert Company Sold Inventory to an Australian Company for 50,000