Tinitoys,Inc. ,a domestic company,purchased inventory from a Brazilian company for 500,000 Brazilian reals (Br.reals)on May 1,20X2.Payment is due on June 30,20X2.On May 1,20X2,Tinitoys also entered into a 60-day forward contract to purchase 500,000 Brazilian reals.The forward contract is not designated as a hedge.Tinitoys' fiscal year ends on May 31.The direct exchange rates were as follows:

-Based on the preceding information,the entries on June 30,20X2,include a
A)debit to Foreign Currency Transaction Loss,$4,000.
B)credit to Foreign Currency Units (Br.reals),$262,500.
C)credit to Cash,$262,500.
D)debit to Dollars Payable to Exchange Broker,$254,000.

Question

Tinitoys,Inc. ,a domestic company,purchased inventory from a Brazilian company for 500,000 Brazilian reals (Br.reals)on May 1,20X2.Payment is due on June 30,20X2.On May 1,20X2,Tinitoys also entered into a 60-day forward contract to purchase 500,000 Brazilian reals.The forward contract is not designated as a hedge.Tinitoys' fiscal year ends on May 31.The direct exchange rates were as follows:
 
-Based on the preceding information,the entries on June 30,20X2,include a
A)debit to Foreign Currency Transaction Loss,$4,000. 
B)credit to Foreign Currency Units (Br.reals),$262,500. 
C)credit to Cash,$262,500. 
D)debit to Dollars Payable to Exchange Broker,$254,000.

Quizplus · Accepted Answer

On June 30, 20X2, Tinitoys needs to make payment of 500,000 Brazilian reals to the Brazilian company. The direct exchange rate on this date is 0.525 dollars per Br. real (1/1.9).

Since Tinitoys entered into a forward contract to buy Brazilian reals, it can settle its payables using the Br. reals obtained from the forward contract. Therefore, Tinitoys will need to settle the forward contract on June 30, 20X2, which means it will receive 500,000 Br. reals and pay the dollar equivalent.

The dollar amount to be paid for the Br. reals will be determined based on the forward rate in effect on May 1, 20X2, the date Tinitoys entered into the forward contract. The forward rate for a 60-day contract on this date is 0.53 dollars per Br. real.

Therefore, Tinitoys will need to pay 500,000 x 0.53 = $265,000 for the Br. reals obtained from the forward contract. To record this transaction, Tinitoys will debit Foreign Currency Units (Br. reals) for 500,000 and credit Cash for $265,000.

There is no foreign currency transaction loss or exchange broker involved in this transaction, so options A and D can be eliminated. Option B is incorrect because it suggests only a credit to Foreign Currency Units (Br. reals) without recognizing the corresponding cash payment.