acifico Company, a U.S.-based importer of beer and wine, purchased 1,900 cases of Oktoberfest-style beer from a German supplier for 570,000 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 $1.50) August 15 $ 1.50 $ 1.56 $ 0.05 September 30 1.55 1.59 0.06 October 15 1.58 1.58 (spot) N/A The company closes its books and prepares third-quarter financial statements on September 30. b. Assume that the beer arrived on August 15, and the company made payment on October 15. On August 15, the company entered into a two-month forward contract to purchase 570,000 euros. The company designated the forward contract as a cash flow hedge of a foreign currency payable. Forward points are excluded in assessing hedge effectiveness and amortized to net income using a straight-line method on a monthly basis. Prepare journal entries to account for the import purchase and foreign currency forward contract.
acifico Company, a U.S.-based importer of beer and wine, purchased 1,900 cases of Oktoberfest-style beer from a German supplier for 570,000 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 $1.50) |
||||||
| August 15 | $ | 1.50 | $ | 1.56 | $ | 0.05 | |||
| September 30 | 1.55 | 1.59 | 0.06 | ||||||
| October 15 | 1.58 | 1.58 | (spot) | N/A | |||||
The company closes its books and prepares third-quarter financial statements on September 30.
b. Assume that the beer arrived on August 15, and the company made payment on October 15. On August 15, the company entered into a two-month forward contract to purchase 570,000 euros. The company designated the forward contract as a
108/15Inventory855,000 Accounts payable (euro) 855,000 209/01Foreign exchange gain or loss28,500 Accounts payable (euro) 28,500 309/30Other comprehensive income28,500 Accounts payable (euro) 28,500 409/30Forward contract17,100 Other comprehensive income 17,100 509/30Foreign exchange gain or loss17,100 Other comprehensive income 17,100 609/30Foreign exchange gain or loss(17,100) Adjustment to net income (17,100) 710/15Other comprehensive income17,100 Accounts payable (euro) 17,100 810/15Other comprehensive income5,700 Forward contract 5,700 910/15Foreign exchange gain or loss17,100 Other comprehensive income 17,100 1010/15Foreign currency (euro)900,000 Cash 888,600 Forward contract 11,400 1110/15Accounts payable (euro)900,600 Foreign currency (euro) 900,600 1210/15Cost of goods sold855,000 Inventory 855,000 1310/15Cost of goods sold(855,000) Foreign exchange gain or loss(28,500) Adjustment to net income (883,500)
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