Assuming that MNC did not enter into a forward contract, how much foreign exchange gain or loss should it report on its 2013 income statement with regard to this transaction?
a. $5,000 gain.
b. $3,000 gain.
c. $2,000 loss.
d. $1,000 loss.
MNC Corp. (a U.S.-based company) sold parts to a South Korean customer on December 1, 2013, with payment of 10 million South Korean won to be received on March 31, 2014. The following exchange rates apply:
_____________________________________________Forward Rate
Date ____________________ Spot Rate ______(to March 31, 2014)
December 1, 2013 ................. $0.0035 ............... $0.0034
December 31, 2013................. 0.0033 ..................0.0032
March 31, 2014 ..................... 0.0038 .....................N/A
MNC's incremental borrowing rate is 12 percent. The present value factor for three months at an annual interest rate of 12 percent (1 percent per month) is 0.9706.