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A U.S. company anticipates that it will sell merchandise for €100,000 at the end of August and receive payment for it at the end of October. On May 1, when the spot rate is $1.20 and the forward rate for delivery on October 31 is $1.21, the company enters a forward contract to sell €100,000 on October 31. The forward contract qualifies as a cash flow hedge of the forecasted sale. The company sells the merchandise on August 30, when the spot rate is $1.232 and the forward rate for October 31 delivery is $1.23 and receives payment of €100,000 and closes the forward contract on October 31, when the spot rate is $1.24. The company has a December 31 year-end.
-Sales revenue is reported on the company's income statement in the amount of:

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Quizplus · Accepted Answer

Changes in the value of the forward contract remain in other comprehensive income until the date of sale, when they are reclassified as an adjustment to sales revenue. ($1.23 - $1.21) x €100,000 = $2,000 loss in OCI is reclassified as a reduction in sales revenue of $1.232 x €100,000 = $123,200. Net sales revenue is $121,200.

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