REFERENCE: Ref.09_07 Winston Corp. ,A U.S.company,had the Following Foreign Currency Transactions During

question 48

Multiple Choice

REFERENCE: Ref.09_07
Winston Corp. ,a U.S.company,had the following foreign currency transactions during 2008:
(1. ) Purchased merchandise from a foreign supplier on July 16,2008 for the U.S.dollar equivalent of $47,000 and paid the invoice on August 3,2008 at the U.S.dollar equivalent of $54,000.
(2. ) On October 15,2008 borrowed the U.S.dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15,2008.The U.S.dollar equivalent of the note amount was $295,000 on December 31,2008,and $299,000 on October 15,2009.
-Atherton,Inc. ,a U.S.company,expects to order goods from a foreign supplier at a price of 100,000 lira,with delivery and payment to be made on April 17.On January 17,Atherton purchased a three-month call option on 100,000 lira and designated this option as a cash flow hedge of a forecasted foreign currency transaction.The following exchange rates apply:
What amount will Atherton include as an option expense in net income during the period January 17 to April 17?

• A)$4,000
• B)$4,260
• C)$4,340
• D)$5,000
• E)$5,260

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Definitions:

Cash Flow Statement

A financial document detailing the inflow and outflow of cash in a business, thereby indicating its operating, investing, and financing activities over a period.

Statement of Equity

A financial document that outlines the changes in the equity section of the balance sheet during a certain period, including profits retained in the business, dividends paid, and equity capital injections.

Gross Profit

The difference between revenue and the cost of goods sold before deduction of overheads, interests, and taxes.

Gross Sales

The revenue earned from the sale of merchandise to customers.