On April 1, Quality Corporation, a U.S. company, expects to sell merchandise to a French customer in three months, denominating the transaction in euros. On April 1, the spot rate is $1.41 per euro, and Quality enters into a three-month forward contract cash flow hedge to sell 400,000 euros at a rate of $1.36. At the end of three months, the spot rate is $1.37 per euro, and Quality delivers the merchandise, collecting 400,000 euros. What are the effects on net income from these transactions?
A) $8,000 Discount Expense plus a $12,000 negative Adjustment to Net Income when the merchandise is delivered.
B) $8,000 Discount Expense plus a $12,000 positive Adjustment to Net Income when the merchandise is delivered.
C) $8,000 Discount Expense plus a $20,000 negative Adjustment to Net Income when the merchandise is delivered.
D) $8,000 Discount Expense plus a $20,000 positive Adjustment to Net Income when the merchandise is delivered.
E) $8,000 Discount Expense plus an $8,000 positive Adjustment to Net Income when the merchandise is delivered.

Question

Quizplus · Accepted Answer

The Answer of On April 1, Quality Corporation, a U.S. company, expects to sell merchandise to a French customer in three months, denominating the transaction in euros. On April 1, the spot rate is $1.41 per euro, and Quality enters into a three-month forward contract cash flow hedge to sell 400,000 euros at a rate of $1.36. At the end of three months, the spot rate is $1.37 per euro, and Quality delivers the merchandise, collecting 400,000 euros. What are the effects on net income from these transactions?
A) $8,000 Discount Expense plus a $12,000 negative Adjustment to Net Income when the merchandise is delivered.
B) $8,000 Discount Expense plus a $12,000 positive Adjustment to Net Income when the merchandise is delivered.
C) $8,000 Discount Expense plus a $20,000 negative Adjustment to Net Income when the merchandise is delivered.
D) $8,000 Discount Expense plus a $20,000 positive Adjustment to Net Income when the merchandise is delivered.
E) $8,000 Discount Expense plus an $8,000 positive Adjustment to Net Income when the merchandise is delivered.