Advanced Accounting 12th Edition by Joe Ben Hoyle,Thomas Schaefer , Timothy Doupnik

Exercise 2

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 $0.10 per Swedish krona, Pimlico enters into a forward contract to purchase 500,000 Swedish kroner at a three-month forward rate of $0.12. At the end of three months, when the spot rate is $0,115 per Swedish krona, Pimlico orders and receives the merchandise, paying 500,000 kroner. What amount does Pimlico report in net income as a result of this cash flow hedge of a forecasted transaction
A) $10,000 Premium Expense plus a $7,500 positive Adjustment to Net Income when the merchandise is purchased.
B) $10,000 Discount Expense plus a $5,000 positive Adjustment to Net Income when the merchandise is purchased.
C) $2,500 Premium Expense plus a $5,000 negative Adjustment to Net Income when the merchandise is purchased.
D) $2,500 Premium Expense plus a $2,500 positive Adjustment to Net Income when the merchandise is purchased.