A US Company Forecasts That It Will Receive A$1,000,000 in Sales

Essay

A U.S. company forecasts that it will receive A$1,000,000 in sales revenues from an Australian customer in 5 months. To lock in the dollar value of these revenues, on October 25, 2020, it enters a forward sale contract to deliver A$1,000,000 to a broker on March 25, 2021. The contract qualifies as a cash flow hedge of the forecasted sale. On March 25, 2021, the U.S. company receives A$1,000,000 in payment from the customer, records the revenue as earned, and sells the currency using the forward contract. The U.S. company's accounting year ends December 31. Relevant exchange rates ($/A$) are:
$$\begin{array} { | l | c | c | } \hline & \text { Spot Rate } & \begin{array} { c } \text { Forward Rate for } \\\text { March 25, 2021 Delivery }\end{array} \\\hline \text { October 25, 2020 } & \$ 0.777 & \$ 0.778 \\\hline \text { December 31, 2020 } & 0.774 & 0.776 \\\hline \text { March 25, 2021 } & 0.771 & 0.771 \\\hline\end{array}$$ Required
a. Calculate the following balances, reported on the U.S. company's books:
i. Investment in forward, December 31, 2020 (indicate whether it is an asset or liability).
ii. Sales revenue, 2021
b. Now assume the U.S. company closes the forward contract on February 1, 2021 when the forward rate for March 25 delivery is $0.773. What is sales revenue for 2021.