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
Which of the following memorandum entries best describes the signing of the forward contract on January 2, 2019?

A) ABC Inc. entered into a forward contract to pay US$60,000 in exchange for CDN$83,850 to be received from the bank on May 1, 2019.
B) ABC Inc. entered into a forward contract to pay US$60,000 in exchange for CDN$82,500 to be received from the bank on May 1, 2019.
C) ABC Inc. entered into a forward contract to pay CDN$84,000 in exchange for US$60,000 to be received from the bank on May 1, 2019.
D) ABC Inc. entered into a forward contract to pay US$60,000 in exchange for CDN$84,000 to be received from the bank on May 1, 2019.

Question

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
Which of the following memorandum entries best describes the signing of the forward contract on January 2, 2019?

A) ABC Inc. entered into a forward contract to pay US$60,000 in exchange for CDN$83,850 to be received from the bank on May 1, 2019.
B) ABC Inc. entered into a forward contract to pay US$60,000 in exchange for CDN$82,500 to be received from the bank on May 1, 2019.
C) ABC Inc. entered into a forward contract to pay CDN$84,000 in exchange for US$60,000 to be received from the bank on May 1, 2019.
D) ABC Inc. entered into a forward contract to pay US$60,000 in exchange for CDN$84,000 to be received from the bank on May 1, 2019.

Shawnee Brown · Accepted Answer

Final Answer : D, Explanation :  ABC Inc. entered into a forward contract to sell US$60,000 and in return, it would receive CDN$ at the forward rate of CDN$1.40 per US$1. Therefore, US$60,000 * CDN$1.40 = CDN$84,000.

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