Taste Bits Inc. purchased chocolates from Switzerland for 200,000 Swiss francs (

Question

Taste Bits Inc. purchased chocolates from Switzerland for 200,000 Swiss francs (SFr) on December 1, 20X8. Payment is due on January 30, 20X9. On December 1, 20X8, the company also entered into a 60-day forward contract to purchase 100,000 Swiss francs. The forward contract is not designated as a hedge. The rates were as follows:

Spot Rate

Forward Rate

December 1, 20X8

$0.89

$0.90 (60 days)

December 31, 20X8

0.91

0.93 (30 days)

January 30, 20X9

0.92

1. Based on the preceding information, the entries on December 31, 20X8, include a:
A. Credit to Foreign Currency Payable to Exchange Broker, $4,000.
B. Debit to Foreign Currency Receivable from Exchange Broker, $6,000.
C. Debit to Foreign Currency Receivable from Exchange Broker, $186,000.
D. Debit to Foreign Currency Transaction Gain, $4,000.

2. Based on the preceding information, the entries on January 30, 20X9, include a:

A. Debit to Dollars Payable to Exchange Broker, $180,000.
B. Credit to Cash, $184,000.
C. Credit to Premium on Forward Contract, $4,000.
D. Credit to Foreign Currency Receivable from Exchange Broker, $180,000.

3. Based on the preceding information, the entries on January 30, 20X9, include a:
A. Debit to Dollars Payable to Exchange Broker, $184,000.
B. Credit to Foreign Currency Transaction Gain, $4,000.
C. Credit to Foreign Currency Receivable from Exchange Broker, $180,000.
D. Debit to Foreign Currency Units (SFr), $184,000.

Thank you!

Spot Rate

Forward Rate

December 1, 20X8

$0.89

$0.90 (60 days)

December 31, 20X8

0.91

0.93 (30 days)

January 30, 20X9

0.92

Explanation / Answer

1. Option d because Profit on 100,000 Swiss Francs = 100,000(0.92-0.90) = $ 4,000 has to be adjusted as per the MV

2. Option A Debit to Dollars Payable to Exchange Broker, $180,000 because of the forward rate as on Dec 1 2019 to be considered

3. Option d, Debit to Foreign Currency Units (SFr), $184,000.

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