St. Philip Company ordered parts costing €100,000 from a foreign supplier on Jan

Question

St. Philip Company ordered parts costing €100,000 from a foreign supplier on January 15 when the spot rate was $0.20 per €. A one-month forward contract was signed on that date to purchase €100,000 at a forward rate of $0.23. The forward contract is properly designated as a fair value hedge of the €100,000 firm commitment. On February 15, when the company receives the parts, the spot rate is $0.22. At what amount should St. Philip Company carry the parts inventory on its books?

a. $20,000.

b. $21,000.

c. $22,000.

d. $23,000.

Explanation / Answer

The parts inventory will be recognized by St. Philip Company at the spot rate at the date of receipt .So amount to be recorded on its books is  

(€100,000 x $.22 = $22,000).

Answer: C

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