Problem Chapter 7 (Worth 12 points.) On December 1, 20x1 Pimlico made sales to a

Question

Problem Chapter 7 (Worth 12 points.)

On December 1, 20x1 Pimlico made sales to a customer in India and recorded Accounts Receivable of 10,000,000 rupees. The customer has until March 1, 20x2 to pay. On December 1,20x1, Pimlico paid $500 for a put option to sell rupees at a strike price of $2.30 per 100 rupees on March 1, 20x2, which was the spot rate on December 1,20x1. OnDecember 31,20x1, the spot rate was $2.80 per 100 rupees and the option premium was $0,004 per 100 rupees.

Answer the following. Show'supporting calculations in good accounting form.

1. What is the fair value of the option on December 1,20x1?^:^ q      r

2. What is the fair value of the option on December 31, 20x1?^-^

3. What is the foreign currency exchange gain or loss on December 31, 20x1? Jtl^COQ ^^'^

4. If the spot rate on March 1, 20x2 was $2.45 per 100 rupees, what is the foreign currency exchange gain or loss that should be recorded that day Y^ gr ^

».' 10

Chapter 8 Multiple Choice

Explanation / Answer

1)Fair value of option on Dec 1st 20X1 is $500. As it is the option premium paid.

2)Fair value of option on Dec 31st 20X1 is $400. As it is the option premium paid. ($0.004*10^7/10^2=$400)

3)On Dec31st it is the forein exchnage gain of (2.8-2.3)*10&7/10^2=$500,000. As there is increase in spot rate from 2.3 to 2.8

4)Foreign exchange gain of (2.45-2.3)*10^7/10^2=$15,000.

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