On March 1, Pimlico Corporation (a U. S.-based company) expects to order merchandise from a supplier in Sweden in three months. On March 1, when the spot rate is $0.44 per Swedish krona, Pimlico enters into a forward contract to purchase 695,000 Swedish kroner at a three-month forward rate of $0.460. At the end of three months, when the spot rate is $0.455 per Swedish krona, Pimlico orders and receives the merchandise, paying 695,000 kroner. What amount does Pimlico report in net income as a result of this cash flow hedge of a forecasted transaction

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Business

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29 June, 04:38

On March 1, Pimlico Corporation (a U. S.-based company) expects to order merchandise from a supplier in Sweden in three months. On March 1, when the spot rate is $0.44 per Swedish krona, Pimlico enters into a forward contract to purchase 695,000 Swedish kroner at a three-month forward rate of $0.460. At the end of three months, when the spot rate is $0.455 per Swedish krona, Pimlico orders and receives the merchandise, paying 695,000 kroner. What amount does Pimlico report in net income as a result of this cash flow hedge of a forecasted transaction

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Anabella Walker · Answer 1

Answer and Explanation:

The computation is shown below:

a. As a premium expense

= ($0.460 - $0.44) * 695,000

= $13,900

b. As a difference of 3 months spot rate and spot rate

= ($0.455 - $0.44) * 695,000

= $10,425

The first one represents the premium expense for $13,900 and the second part represents the adjustment to the net income in a positive way