Larson, Inc. sold merchandise for 600,000 FC to a foreign vendor on November 30, 20X5. Payment in foreign currency is due January 31, 20X6. On the same day, Larson signed an agreement with a foreign exchange broker to sell 600,000 FC on January 31, 20X6. The discount rate is 8% and exchange rates to purchase 1 FC are as follows: What is the net amount of the gains or losses recognized in the financial statements for the year ended December 31, 20x5?

Question

Larson, Inc. sold merchandise for 600,000 FC to a foreign vendor on November 30, 20X5. Payment in foreign currency is due January 31, 20X6. On the same day, Larson signed an agreement with a foreign exchange broker to sell 600,000 FC on January 31, 20X6. The discount rate is 8% and exchange rates to purchase 1 FC are as follows:  What is the net amount of the gains or losses recognized in the financial statements for the year ended December 31, 20x5?

Quizplus · Accepted Answer

11eb11de_92db_761c_ad38_ed6ec7a77d03_TB2014_00 Original forward value
600,000 F1F1F1S1F1F1F10 1.47 = 882,000
Current (12/31) forward value
600,000 F1F1F1S1F1F1F10 1.43 = 858,000
Change - gain (loss) in forward value
24,000
PV of change, discounted at 8%, n
 11eb11de_92db_761d_ad38_83fbf9e53d23_TB2014_11 1
24,000 - (24,000 F1F1F1S1F1F1F10 [.08 ÷ 12]) = 23,840
The net amount of earnings in the financial statements is 23,840 - 18,000 = 5,840 gain