Question

St. Philip Company ordered parts costing €250,000 from a foreign supplier on January 15 when the spot rate was $0.28 per €. A one-month forward contract was signed on that date to purchase €250,000 at a forward rate of $0.30. The forward contract is properly designated as a fair value hedge of the €250,000 firm commitment. On February 15, when the company receives the parts, the spot rate is $0.29. At what amount should St. Philip Company carry the parts inventory on its books?

a. $75,000
b. $70,000
c. $71,500
d. $72,500

Answer 1

St. Philip Company should carry the parts inventory on its books at $72,500. The right answer is d.

Step-by-step explanation:

According to the given data we have the following:

Parts of the Inventory= €250,000

when the company receives the parts, the spot rate is $0.29

The parts inventory will be recognized at the spot rate at the date of receipt

Therefore, in order to calculate At what amount should St. Philip Company carry the parts inventory on its books, we would have to make the following calculation:

€250,000 x $0.29 = $72,500

St. Philip Company should carry the parts inventory on its books at $72,500