Spartan Company purchased interior decoration material from Egypt for 100,000 Egyptian pounds on September 5,20X8,with payment due on December 2,20X8.Additionally,on September 5,Spartan acquired a 90-day forward contract to purchase 100,000 Egyptian pounds of E£ = $.1850.The forward contract was acquired to manage the exposed net liability position in Egyptian pounds,but it was not designated as a hedge.The spot rates were:

-Based on the preceding information,in the entry made on December 2^nd to revalue foreign currency receivable to current equivalent U.S.dollar value,

Question

Spartan Company purchased interior decoration material from Egypt for 100,000 Egyptian pounds on September 5,20X8,with payment due on December 2,20X8.Additionally,on September 5,Spartan acquired a 90-day forward contract to purchase 100,000 Egyptian pounds of E£ = $.1850.The forward contract was acquired to manage the exposed net liability position in Egyptian pounds,but it was not designated as a hedge.The spot rates were:

-Based on the preceding information,in the entry made on December 2^nd to revalue foreign currency receivable to current equivalent U.S.dollar value,

Quizplus · Accepted Answer

On September 5th, Spartan Company purchased 100,000 Egyptian pounds at a forward rate of $.1850 per Egyptian pound, which gives a total of $18,500. On December 2nd, when the payment is due, the spot rate for Egyptian pounds is $.1840 per Egyptian pound. Therefore, the foreign currency transaction gain is calculated as follows:

100,000 Egyptian pounds x ($.1840 - $.1850) = $-100

Since there is a loss on the forward exchange contract (the spot rate is lower than the forward rate), the loss should be recognized as an expense in the income statement. Therefore, the entry to revalue the foreign currency receivable would be:

Accounts Payable (100,000 Egyptian pounds x $.1840)    $18,400
Foreign Currency Transaction Gain                                $150
Loss on Forward Exchange Contract                                  $-100

The total debit in this case is $18,350, and the option that best reflects this amount is option A. Option B is incorrect because it suggests that Foreign Currency Units will be debited instead of Accounts Payable. Option D is incorrect because it suggests that Other Comprehensive Income will be credited, which is not the case in this scenario. The loss on the forward exchange contract should be recognized as an expense in the income statement, not in Other Comprehensive Income.

Spartan Company Purchased Interior Decoration Material from Egypt for 100,000