On November 30, 2019, a U.K. company, with a December 31 year-end, enters a forward purchase contract for €100,000 to be delivered for £0.75/€ on April 20, 2020. The contract hedges a forecasted purchase of equipment. At year-end, the forward rate for delivery on April 20 is £0.77/€. The forward is closed, and the equipment purchased on April 20, when the spot rate is £0.78/€. The company follows IFRS. Assuming no residual value, total depreciation expense over the life of the equipment is:

Question

Quizplus · Accepted Answer

The equipment is recorded at the spot rate of £0.78 x €100,000 = £78,000, reduced for the £3,000 [= (£0.78 - £0.75) x €100,000] gain on the forward contract.