acifico Company, a U.S.-based importer of beer and wine, purchased 1,100 cases of Oktoberfest-style beer from a German supplier for 242,000 euros. Relevant U.S. dollar exchange rates for the euro are as follows: Date Spot Rate Forward Rate to October 15 Call Option Premium for October 15 (strike price $1.10) August 15 $ 1.10 $ 1.16 $ 0.05 September 30 1.15 1.19 0.06 October 15 1.18 1.18 (spot) N/A The company closes its books and prepares third-quarter financial statements on September 30 Assume that, on August 15, the company forecasted the purchase of beer on October 15. On August 15, the company acquired a two-month call option on 242,000 euros. The company designated the option as a cash value hedge of a forecasted foreign currency transaction. The time value of the option is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income over the life of the option. Prepare journal entries to account for the foreign currency option and import purchase. Record purchase of inventory from the German supplier. Record the transfer of inventory to cost of goods sold. Record the adjustment of cost of goods sold to the extent of Other Comprehensive Income.
Pacifico Company, a U.S.-based importer of beer and wine, purchased 1,100 cases of Oktoberfest-style beer from a German supplier for 242,000 euros. Relevant U.S. dollar exchange rates for the euro are as follows:
Date | Spot Rate | Forward Rate to October 15 |
Call Option Premium for October 15 (strike price $1.10) |
||||||
August 15 | $ | 1.10 | $ | 1.16 | $ | 0.05 | |||
September 30 | 1.15 | 1.19 | 0.06 | ||||||
October 15 | 1.18 | 1.18 | (spot) | N/A | |||||
The company closes its books and prepares third-quarter financial statements on September 30
Assume that, on August 15, the company
- Record purchase of inventory from the German supplier.
- Record the transfer of inventory to cost of goods sold.
- Record the adjustment of cost of goods sold to the extent of Other Comprehensive Income.
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