On 4/1/18, a U.S.Company commits to sell a piece of equipment to a French customer.At that time, the U.S.company enters into a forward contract to sell foreign currency on 8/1/18 (120 days).Delivery and payment will take place 8/1/18.The fiscal year end for the company is 6/30/18.The sales price of the equipment is 200,000 Euros.Various exchange rates are as follows: ?

$$\begin{array} { l r r }
& \text { Spot } & \text { Forward } \
\hline 4 / 1 / 18 & 1 \mathrm { FC } = \$ 0.60 & 1 \mathrm { FC } = \$ 0.58 \
6 / 30 / 18 & 1 \mathrm { FC } = \$ 0.57 & 1 \mathrm { FC } = \$ 0.56 \
8 / 1 / 18 & 1 \mathrm { FC } = \$ 0.55 & 1 \mathrm { FC } = \$ 0.55
\end{array}$$ Discount rate is 12%.What is the amount in the Firm Commitment account on 6/30/18?

Question

On 4/1/18, a U.S.Company commits to sell a piece of equipment to a French customer.At that time, the U.S.company enters into a forward contract to sell foreign currency on 8/1/18 (120 days).Delivery and payment will take place 8/1/18.The fiscal year end for the company is 6/30/18.The sales price of the equipment is 200,000 Euros.Various exchange rates are as follows: ?

$$\begin{array} { l r r } 
& \text { Spot } & \text { Forward } \
\hline 4 / 1 / 18 & 1 \mathrm { FC } = \$ 0.60 & 1 \mathrm { FC } = \$ 0.58 \
6 / 30 / 18 & 1 \mathrm { FC } = \$ 0.57 & 1 \mathrm { FC } = \$ 0.56 \
8 / 1 / 18 & 1 \mathrm { FC } = \$ 0.55 & 1 \mathrm { FC } = \$ 0.55
\end{array}$$ Discount rate is 12%.What is the amount in the Firm Commitment account on 6/30/18?

Quizplus · Accepted Answer

The Firm Commitment account represents the potential loss that may occur due to changes in exchange rates. It is calculated as the difference between the foreign currency's contracted price and its fair value on the financial statement date (in this case, 6/30/18).

To calculate the fair value, we need to find the present value of the Euros using the discount rate of 12% from the date of the forward contract (4/1/18) to the financial statement date (6/30/18).

Fair value = 200,000 / (1 + 0.12 x 90/360) = 189,600 Euros

Since the contracted price is higher than the fair value, the Firm Commitment account is a credit balance.

Firm Commitment account = 200,000 - 189,600 = 10,400 Euros = 3,960 credit (since Euros are a credit balance).

Therefore, the correct answer is C – 3,960 credit.

On 4/1/18, a U Discount Rate Is 12