On December 1, Year 1, Tackett Company (a U.S.-based company) entered into a three-month forward contract to purchase 1 million Mexican pesos on March 1, Year 2. The following U.S. dollar–peso exchange rates apply:

Tackett’s incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent (1 percent per month) is 0.9803. Which of the following correctly describes the manner in which Tackett Company will report the forward contract on its December 31, Year 1, balance sheet?

a. As an asset in the amount of $3,921.20.

b. As an asset in the amount of $7,842.40.

c. As a liability in the amount of $13,724.20.

d. As a liability in the amount of $9,803.00.

Transcribed Image Text:

Date December 1, Year 1 December 31, Year 1 March 1, Year 2 Spot Rate Forward Rate (to March 1, Year 2) $0.088 $0.084 0.080 0.074 0.076