On November 2, 20X9, Henry Company Purchased a Machine for 100,000

Multiple Choice

On November 2, 20X9, Henry Company purchased a machine for 100,000 Swiss francs (CHF) with payment required on March 30, 20X10. To eliminate the risk of foreign exchange losses on this payable, Henry entered into a forward exchange contract on November 3, 20X9, to receive CHF 100,000 at a forward rate of CHF1 = $2 on March 30, 20X10. The spot rate was CHF1 = $1.95 on November 2, 20X9, and CHF1 = $1.97 on December 1, 20X9.
- How should the premium or discount on the forward exchange contract be accounted for?

A) It should be expensed on the inception date of the forward exchange contract.
B) It should be expensed over the five-month term of the forward exchange contract.
C) It should be expensed on the maturity date of the forward exchange contract.
D) It should be added to the cost of the machine.