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A U.S. company anticipates that it will purchase merchandise for €100,000 at the end of August and pay for it at the time the merchandise is delivered. On May 1, when the spot rate is $1.20 and the forward rate for delivery on August 30 is $1.21, the company enters a forward contract to buy €100,000 on August 30. The forward contract qualifies as a cash flow hedge of the forecasted purchase. The company purchases the merchandise on August 30, when the spot rate is $1.232, and closes the forward contract and pays the supplier €100,000. The company sells the merchandise in October. The company has a December 31 year-end.
-On August 30, the company records the merchandise at what amount?

Question

Quizplus · Accepted Answer

Changes in the value of the forward contract remain in other comprehensive income until the merchandise is sold. Therefore, the merchandise is recorded at the spot rate at the date of purchase, $1.232 x €100,000 = $123,200.

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