To account for a forward contract cash flow hedge of a foreign currency denomina

Question

To account for a forward contract cash flow hedge of a foreign currency denominated asset or liability at initiation date requires which of the following:

Multiple Choice

(A) 1. Recognize the transaction (sale or purchase) and foreign currency denominated asset or liability 2. Recognize option as an asset (purchase price is fair value)

(B) 1. No entry related to the firm commitment (zero value) 2. No entry related to forward contract (zero fair value)

(C) 1. Recognize the transaction (sale or purchase) and foreign currency denominated asset or liability 2. No entry related to forward contract (zero fair value)

(D) 1.Recognize the transaction (sale or purchase). 2. Recognize the option as a liability.

(E) 1. None. No journal entry is required.

Explanation / Answer

Corrent option is (D) 1.Recognize the transaction (sale or purchase). 2. Recognize the option as a liability.

Forward Contract is an agreement between buyer and seller to deliver a commodity on a future date for a specified price. Forward contracts are used in transactions using foreign exchange in order to reduce the risk of losses due to changes in exchange rates.

Whether buyer or seller of forward contract, initially recognize forward contract as a liability.

Hence to account a forward contract cash flow hedge of a foreign currency denominated asset or liability at initiation date required recognize the trasaction (sale or purchase) and recognize the option as a liability..

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