Belsen purchased inventory on December 1, 2010. Payment of 200,000 stickles was to be made in sixty days. Also on December 1, Belsen signed a contract to purchase §200,000 in sixty days. The spot rate was §1 = .35714, and the 60-day forward rate was §1 = $.38462. On December 31, the spot rate was §1 = .34483 and the 30-day forward rate was §1 = .38168. Assume an annual interest rate of 12% and a fair value hedge. The present value for one month at 12% is .9901. In the journal entry to record the establishment of a forward exchange contract, at what amount should the Forward Contract account be recorded on December 1?
A) $71,428.
B) $76,924.
C) $588.
D) $582.
E) $0, since there is no cost, there is no value for the contract at this date.

Question

Quizplus · Accepted Answer

The forward contract is initially recorded at zero because it is a fair value hedge and there is no initial cost to enter into the contract.

Belsen Purchased Inventory on December 1, 2010