On 6/1/17, an American Firm Purchased a Inventory Costing 100,000

question 6

Multiple Choice

On 6/1/17, an American firm purchased a inventory costing 100,000 Canadian Dollars from a Canadian firm to be paid for on 9/1/17.Also on 6/1/17, the American firm entered into a forward contract to purchase 100,000 Canadian dollars for delivery on 9/1/17.The exchange rates were as follows: ?

$$\begin{array} { l r r r } & \text { Spot } & \text { Forward } \\\hline 6 / 1 / 17 & 1 \mathrm { CD } = \$ 0.73 & 1 \mathrm { CD } = \$ 0.74 \\6 / 30 / 17 & 1 \mathrm { CD } = \$ 0.75 & 1 \mathrm { CD } = \$ 0.76 \\9 / 1 / 17 & 1 \mathrm { CD } = \$ 0.78 & 1 \mathrm { CD } = \$ 0.78\end{array}$$
The American firm's fiscal year end is 6/30/17.The changes in the value of the forward contract should be discounted at 8%.The transaction qualifies as for accounting as a cash flow hedge.What is the amount that will be recognized in earnings in the year ended 6/30/17?

• A)$1,000
• B)$667
• C)$333
• D)$0

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