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Question: On March 1, Derby Corporation (a U.


On March 1, Derby Corporation (a U.S.-based company) expects to order merchandise from a sup- plier in Norway in three months. On March 1, when the spot rate is $0.10 per Norwegian krone, Derby enters into a forward contract to purchase 500,000 Norwegian kroner at a three-month for- ward rate of $0.12. Forward points are excluded in assessing the forward contract’s effectiveness as a hedge, and are amortized to net income on a straight-line basis. At the end of three months, when the spot rate is $0.115 per Norwegian krone, Derby orders and receives the merchandise, paying 500,000 kroner. The merchandise is sold within 30 days. What amount(s) does Derby report in net income as a result of this cash flow hedge of a forecasted transaction and the related purchase and sale of merchandise?
a. Cost of goods sold of $60,000
b. Cost of goods sold of $57,500 plus foreign exchange loss of $2,500
c. Cost of goods sold of $50,000 plus foreign exchange loss of $10,000
d. Cost of goods sold of $60,000 less foreign exchange gain of $10,000

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