On November 15, 2012, Paul Corp, a calendar-year-end company, signed a legally b
ID: 2468204 • Letter: O
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
Explanation / Answer
The equipment should be recognized at $360000 which is the amount payable based on the foreign currency forward contract. As the actual amount payable is $360000, it should be recognized for the equipment cost.
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