Foreign Currency Transaction Accounting Assessment

Very Hard Multinational Operations Foreign Currency Transactions

ABC Corporation, headquartered in the United States, is involved in a transaction with a German supplier where it will purchase machinery priced at €200,000. The transaction will be settled in three months. ABC Corporation's current spot rate is 1.12 USD/EUR, and the three-month forward rate is 1.15 USD/EUR. Assume that the relevant exchange rate fluctuations follow standard deviation properties, and the future spot rate is expected to be between 1.10 and 1.20 USD/EUR based on historical volatility.

ABC Corporation wants to assess the impact of the foreign currency transaction on its financial statements and aims to determine the best approach to manage the associated foreign currency risk.

Which of the following statements is true regarding the accounting and management of the foreign currency transaction?

The machinery cost will be reported in USD at the forward exchange rate of 1.15 USD/EUR when the transaction is settled.

The accounting gain or loss will be recognized when the machinery is purchased, based on the current spot rate.

If ABC Corporation uses the forward contract to hedge, any exchange differences will not affect the income statement.

Hint

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