On October 1, 2011, Eagle Company Forecasts the Purchase of Inventory

question 65

Multiple Choice

On October 1, 2011, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2012, at a price of 100,000 British pounds. On October 1, 2011, 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, 2011, the option has a fair value of $1,600. The following spot exchange rates apply:

What is the 2012 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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