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On November 1, Year One, the Abernethy Company signs a forward exchange contract to receive one million Japanese yen on February 1, Year Two, for $10,000 based on the three-month forward exchange rate at that time of $1 for 100 Japanese yen (1,000,000 x 1/100 or $10,000). On that same day, Abernethy agrees to acquire inventory for one million yen when it is delivered on February 1, Year Two. The forward exchange receivable is designated as a hedge for this commitment. On November 1, the spot (current) exchange rate is $1 for 94 Japanese yen but that rate change, by December 31, to $1 for 96 Japanese yen. As of December 31, Year One, the forward exchange rate to be paid one month in the future is $1 for 103 Japanese yen. What is the overall impact to be recognized on net income at the end of Year One?

a) 0

b) $71 loss

c) $221 gain

d) $292 loss

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M947722

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