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RXN's Year-End Is on December 31

question 29

Multiple Choice

RXN's year-end is on December 31. On November 1, 2014 when the U.S. dollar was worth $1.165 CDN, RXN sold merchandise to an American client for $300,000. Full payment of this invoice was expected by March 1, 2015. On December 1, the spot rate was $1.1450 CDN and the three-month forward rate was $1.1250 CDN. In order to minimize its Foreign Exchange risk and exposure, RXN entered into a contract with its bank on December 1, 2014 to deliver $300,000 U.S. in three months' time. The spot rate at year-end was $1.16 CDN and the forward rate from December 31, 2014 to March 1, 2015 was $1.14 CDN. On March 1, 2015, RXN received the $300,000 U.S. from its client and settled its contract with the bank. The forward contract was to be accounted for as a fair value hedge of the US dollar receivable. Significant dates and exchange rates pertaining to this transaction are as follows: What is the amount of RXN's foreign exchange gain or loss prior to its hedge?

Definitions:

Fixed Exchange Rates

A government or central bank policy setting the value of its currency in relation to another currency or a basket of currencies.

Consolidated Statements

Financial statements that present the assets, liabilities, equity, income, expenses, and cash flows of a parent company and its subsidiaries as a single entity.

Future Date

A specific day in the future, identified for the occurrence of a particular event or for the completion of a specified task or agreement.

U.S. Dollars

The authorized fiscal medium of the United States, extensively employed as a reference and backup currency all over the world.