On October 1, 2021, Eagle Company Forecasts the Purchase of Inventory

question 47

Multiple Choice

On October 1, 2021, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2022, at a price of 100,000 British pounds. On October 1, 2021, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2021, the option has a fair value of $1,600. The following spot exchange rates apply: What is the 2022 effect on net income as a result of these transactions?

• A) $195,000
• B) $201,600
• C) $201,000
• D) $202,600
• E) $203,000

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Definitions:

Bankruptcy Abuse Prevention and Consumer Protection Act

A law enacted in 2005 aimed at reforming the bankruptcy system, making it more difficult for individuals to file for Chapter 7 bankruptcy and encouraging Chapter 13 filings.

BAPCPA

The Bankruptcy Abuse Prevention and Consumer Protection Act is a law enacted in 2005 to reform the bankruptcy system in the United States.

Chattel Paper

A document or record that signifies both a monetary obligation and a security interest in or lease of specific goods.

Security Interest

A legal claim or right granted by a debtor to a creditor over the debtor's property, ensuring the property serves as collateral for the repayment of a debt.