On November 2, 20X9, Henry Company Purchased a Machine for 100,000

question 33

Multiple Choice

On November 2, 20X9, Henry Company purchased a machine for 100,000 Swiss francs (CHF) with payment required on March 30, 20X10. To eliminate the risk of foreign exchange losses on this payable, Henry entered into a forward exchange contract on November 3, 20X9, to receive CHF 100,000 at a forward rate of CHF1 = $2 on March 30, 20X10. The spot rate was CHF1 = $1.95 on November 2, 20X9, and CHF1 = $1.97 on December 1, 20X9.
- How should the premium or discount on the forward exchange contract be accounted for?

• A)It should be expensed on the inception date of the forward exchange contract.
• B)It should be expensed over the five-month term of the forward exchange contract.
• C)It should be expensed on the maturity date of the forward exchange contract.
• D)It should be added to the cost of the machine.

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Definitions:

Chattel Mortgage

A loan arrangement where personal movable property is used as security for the loan.

Promissory Note

An economic document that includes a binding commitment from one party to another to deliver a specific amount of funds, payable either upon request or at an agreed-upon date in the future.

Defaulted

The failure to meet legal obligations or conditions, such as not making the required payments on a loan.

Real Defences

Legal defenses that can be used to assert an individual's right or title against the whole world, including in matters of property and debt.