On March 1, 2017, Leach Company entered into a foreign exchange forward contract
ID: 2592476 • Letter: O
Question
On March 1, 2017, Leach Company entered into a foreign exchange forward contract with Montclair Bank to sell Euro 20,000 to be delivered on April 30. Assume that Leach prepares financial statements monthly. The bank exchange rates were shown below:
3-1-2017
3-31-2017
4-30-2017
Spot rate
Euro 1= US$1.15
Euro 1= US$1.13
Euro 1= US$1.12
Forward rate
30 days
60 days
90 days
Euro 1= US$1.18
Euro 1= US$1.20
Euro 1= US$1.21
Euro 1= US$1.17
Euro 1= US$1.19
Euro 1= US$1.20
Euro 1= US$1.15
Euro 1= US$1.17
Euro 1= US$1.18
How was this forward contract reported on Leach’s March 31 balance sheet?
a. in the asset section
b. in the liability section
c. in the equity section
d. the forward contract was not reported on the balance sheet
3-1-2017
3-31-2017
4-30-2017
Spot rate
Euro 1= US$1.15
Euro 1= US$1.13
Euro 1= US$1.12
Forward rate
30 days
60 days
90 days
Euro 1= US$1.18
Euro 1= US$1.20
Euro 1= US$1.21
Euro 1= US$1.17
Euro 1= US$1.19
Euro 1= US$1.20
Euro 1= US$1.15
Euro 1= US$1.17
Euro 1= US$1.18
Explanation / Answer
The correct answer is A.
The forward contract ,which is a type of derivative financial contract is entered between two parties,In this case the first party Leach company has entered in the foreign exchange forward contract to sell Euro 20000 to be delivered on April 30 to the other party Montclair Bank.
Forward rate on the date of contract (3-1-2017) for 60 days (delivery date is April 30)= Euro 1= US$1.20
Spot rate on the data of Leach March 31 balance sheet- Euro 1= US$1.13
Since Leach Company has agreed to sell Euro 20000 at Euro 1=us $1.20 (Forward rate of 60 days ) and the spot rate on March 31 ,balance sheet date is Euro 1= US$1.13,they are having a notional gain of US$0.07.
Since leach company has agreed to sell Euro 20000 at US $1.20 on April 30,but as on balance sheet date spot rate is US $1.13.it will be reported in the asset section (20000*$1.13 under Assets receivable and 20000*$0.07 under Contra Assets).
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