On November 15, 2012, Paul Corp, a calendar-year-end company, signed a legally binding contract to purchase equipment
Question:
On November 15, 2012, Paul Corp, a calendar-year-end company, signed a legally binding contract to purchase equipment from SL Company, a foreign company. The negotiated price is FC 1,000,000. The scheduled delivery date is February 15, 2013. The terms require payment by Paul, upon delivery. The terms also impose a 10% penalty on SL, if the equipment is not delivered by February 15, 2013. To hedge its agreement to pay FC 1,000,000 Paul entered into a foreign currency forward contract on November 15, 2012, to receive FC 1,000,000 on February 15, 2013 at an exchange rate of FC 1.00 = US$ 0.36.
Additional exchange rate information:
Date | Spot Rates | Forward Rates for 2/15/2013 |
11/15/2012 | 1 FC = US$ 0.35 | 1 FC = US$ 0.36 |
12/31/2012 | 1 FC = US$ 0.36 | 1 FC = US$ 0.38 |
2/15/2013 | 1 FC = US$ 0.39 | 1 FC = US$ 0.39 . |
As a result of this hedging transaction, at what amount should Paul recognize the equipment on 2/15/2013?
$420,000
$390,000
$360,000
$350,000
$290,500
Intermediate Accounting
ISBN: 978-1118147290
15th edition
Authors: Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield