ABC Inc Sells Thermal Compressors Throughout the World *For Contracts Expiring on May 1, 2019
What Is the 1

question 10

Multiple Choice

ABC Inc. sells thermal compressors throughout the world. On January 1, 2019, the company sold 500 compressors to an American supplier at a total cost US$60,000 when the spot rate was US$1 = CDN$1.3750. Payment on the invoice was due by May 1, 2019. ABC entered into a 4-month hedge with its bank at a forward rate of CDN$1.40 on January 2, 2019. The forward contract was declared to be a fair value hedge of the fair value of the receivable from the American customer. ABC's year-end is on January 31, and on that date in 2019, the spot rate in effect was CDN$1.3825 and the forward rate to May 1, 2019 was CDN$1.3950. ABC received payment from its supplier on May 1, 2019 when the spot rate was US$1 = CDN$1.3975.
A summary of the significant dates and exchange rates pertaining to this transaction are as follows:
$\begin{array}{|l|r|r|}\hline & \text { Spot Rates } & \text { Forward Rates } \\\hline \text { january 1, } 2019 & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.3750 & \ldots-\cdots \\\hline\begin{array}{l}\text { January 2, } 2019 \text { (Forward contract } \\\text { date) }\end{array} & \text { US } \$ 1=\text { CDN } \$ 1.3750 & \text { US } \$ 1=\text { CDN } \$ 1.40 \\\hline \text { january 31,2019 (Year-end) } & \text { CDN } \$ 1.3825 & \text { CDN } \$ 1.3950 \\\hline \text { May 1, 2019 (Settlement date) } & \text { US\$1 =CDN\$1.3975 } & \text { US\$1 = CDN\$1.3975 }\\\hline\end{array}$ *for contracts expiring on May 1, 2019
What is the required adjustment to the carrying value of the forward contract at the company's year-end?

• A) CDN$300 decrease
• B) CDN$375 increase
• C) CDN$300 increase
• D) Nil

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