REFERENCE: Ref.09_10 on October 1,2007,Eagle Company Forecasts the Purchase of Inventory from Inventory

question 86

Multiple Choice

REFERENCE: Ref.09_10
On October 1,2007,Eagle Company forecasts the purchase of inventory from a British supplier on February 1,2008,at a price of 100,000 British pounds.On October 1,2007,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 31,2007,the option has a fair value of $1,600.The following spot exchange rates apply:
-What is the 2008 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:

FIFO Method

An inventory valuation method (First In, First Out) where the oldest items of inventory are recorded as sold first, with costs of the earliest goods purchased being the first to be recognized in determining cost of sales.

Inventory Valuation

The method or process of calculating the cost or value of inventory held by a business.

Common Stock

A type of security that represents ownership in a corporation, where shareholders are entitled to a portion of the company's profits through dividends and voting rights on corporate matters.

Asset Test

A liquidity ratio, also known as the quick ratio, measuring a company's ability to meet its short-term obligations with its most liquid assets.