On December 1,2011,Joseph Company,a U.S.company,entered into a three-month forward contract to purchase 50,000 pesos on March 1,2012,as a fair value hedge of a foreign currency denominated account payable.The following U.S.dollar per peso exchange rates apply:$\begin{array}{|l|c|c|}
\hline & & \text { Forward Rate } \
\hline \text { Date } & \text { Spot Rate } & \text { (Mar.1, 2012) } \
\hline \text { December 1, 2011 } & \$ 0.092 & \$ 0.105 \
\hline \text { December 31, 2011 } & \$ 0.090 & \$ 0.095 \
\hline \text { March 1, 2012 } & \$ 0.089 & \text { N/A } \
\hline
\end{array}$ Joseph's incremental borrowing rate is 12 percent.The present value factor for two months at an annual interest rate of 12 percent is .9803.Which of the following is included in Joseph's December 31,2011 balance sheet for the forward contract?
A)$5,146.58 asset.
B)$5,146.58 liability.
C)$500 liability.
D)$490.15 asset.
E)$490.15 liability.

Question

Quizplus · Accepted Answer

The forward contract's fair value is determined by the change in the forward rate from the contract date to the balance sheet date. The forward rate decreased from $0.105 to $0.095, resulting in a loss. The loss is calculated as (0.105 - 0.095) * 50,000 = $500. The present value of this loss is $500 * 0.9803 = $490.15, which is recorded as a liability.

On December 1,2011,Joseph Company,a U Joseph's Incremental Borrowing Rate Is 12 Percent