Question

Robert Company sold inventory to an Australian company for 50,000 Australian dollars on April 1, 20X0 with settlement to be in 60 days. On the same date, Robert entered into a 60-day forward contract to sell 50,000 Australian dollars at a forward rate of $1.164 in order to manage its exposed foreign currency receivable. The forward contract is not designated as a hedge. The spot rates were as follows:

April 1 1 Australian dollar = $1.167
May 31 1 Australian dollar = $1.16

Based on the preceding information, had Robert not used the forward exchange contract, what would have been the foreign currency transaction gain or loss for the year?

a. Gain of $200
b. Gain of $150
c. Loss of $350
d. Loss of $200

Answer 1

Answer:

c. Loss of $350

Explanation:

Sales in terms of AUD 50,000.00

Spot Rate on Apr 01 per AUD 1.1670

Total Payment that is to be received on April 1 = 50,000*1.167 58,350.000

The Spot Rate on May 31 per AUD 1.1600

Total Payment to be received on May 31 = 50,000×1.16 =58,000.0000

Therefore,

Loss Suffered due to payment received after 60 Days in $ = 58,350 - 58,000 350.00