On December 1, 2017, Ringling Company (a U.S.-based company) entered into a thre

Question

On December 1, 2017, Ringling Company (a U.S.-based company) entered into a three month forward contract to purchase 1,000,000 pesos on March 1, 2018. The following U.S. dollar per peso exchange rates apply:

Ringling'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 Ringling Company will report the forward contract on its December 31, 2017 balance sheet?

a. As an asset in the amount of $1,960.60.

b. As an asset in the amount of $2,940.90.

c. As a liability in the amount of $980.30.

d. As a liability in the amount of $2,940.90.

Forward Rate Date Spot Rate (to March 1, 2018) December 1, 2017 $0.044 $0.047 December 31, 2017 0.046 0.049 March 1, 2018 0.050 N/A

Explanation / Answer

Ringling company will report the forward contract as an asset on December 31,2017.

Ringling has locked the purchases on Dec 1,2017 at the rate 0.047 , if it would had booked the same on Dec 31, 2017 the rate would have increased by 0.002( 0.049-0.047).

The forward contract must be reported at its fair value discounted for two months.

Therefore PV of forward contract= 10,00,000 *0.002*0.903= $1960.6

Therefore an asset of amount 1960.6 is to be created as on the balance sheet date that is 31st Dec 2017

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.