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Question - On October 1, 2013, Jarvis Co. sold inventory to a customer in a foreign country, denominated in 100,000 local currency units (LCU). Collection is expected in four months. On October 1, 2013, a forward exchange contract was acquired whereby Jarvis Co. was to pay 100,000 LCU in four months (on February 1, 2014) and receive $78,000 in U.S. dollars. The spot and forward rates for the LCU were as follows:
Date
Rate Description
Exchange Rate
October 1, 2013
Spot Rate
$.83 - 1 LCU
December 31, 2013
$.85 = 1 LCU
1-Month Forward Rate
$.80 = 1 LCU
February 1, 2014
$.86 = 1 LCU
The company's borrowing rate is 12%. The present value factor for one month is .9901. Any discount or premium on the contract is amortized using the straight-line method.
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