Taste Bits Inc. purchased chocolates from Switzerland for 200,000 Swiss francs (SFr) on December 1, 20X8. Payment is due on January 30, 20X9. On December 1, 20X8, the company also entered into a 60-day forward contract to purchase 100,000 Swiss francs. The forward contract is not designated as a hedge. The rates were as follows:

-Based on the preceding information,the entries on January 30,20X9,include a:
A) Credit to Foreign Currency Units (SFr), $184,000.
B) Credit to Cash, $180,000.
C) Debit to Foreign Currency Transaction Loss, $4,000.
D) Debit to Dollars Payable to Exchange Broker, $184,000.

Question

Taste Bits Inc. purchased chocolates from Switzerland for 200,000 Swiss francs (SFr) on December 1, 20X8. Payment is due on January 30, 20X9. On December 1, 20X8, the company also entered into a 60-day forward contract to purchase 100,000 Swiss francs. The forward contract is not designated as a hedge. The rates were as follows:
 
-Based on the preceding information,the entries on January 30,20X9,include a:
A) Credit to Foreign Currency Units (SFr), $184,000. 
B) Credit to Cash, $180,000. 
C) Debit to Foreign Currency Transaction Loss, $4,000. 
D) Debit to Dollars Payable to Exchange Broker, $184,000.

Quizplus · Accepted Answer

Since Taste Bits Inc. did not designate the forward contract as a hedge, it should be accounted for separately. Therefore, the company should record the purchase of Swiss francs at the spot rate on December 1, 20X8, which is SFr1 = $0.92. Thus, the cost of chocolates is $184,000 (200,000 SFr × $0.92). On January 30, 20X9, when payment is due, the company would need to pay SFr200,000 + SFr100,000 (from the forward contract) = SFr300,000. The spot rate on January 30, 20X9, is SFr1 = $0.90. Therefore, the company would need to pay $270,000 (SFr300,000 × $0.90) in cash to settle the liability. The entry would be a credit to cash for $270,000 and a debit to foreign currency payable for SFr300,000. There is no foreign currency transaction loss or exchange broker involved in this scenario.