Pacifico Company, a U.S.-based importer of beer and wine, purchased 1,500 cases of Oktoberfest-style beer from a German supplier for 390,000 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 $1.30) August 15 $ 1.30 $ 1.36 $ 0.05 September 30 1.35 1.39 0.06 October 15 1.38 1.38 (spot) N/A The company closes its books and prepares third-quarter financial statements on September 30.
Pacifico Company, a U.S.-based importer of beer and wine, purchased 1,500 cases of Oktoberfest-style beer from a German supplier for 390,000 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 $1.30) |
||||||
| August 15 | $ | 1.30 | $ | 1.36 | $ | 0.05 | |||
| September 30 | 1.35 | 1.39 | 0.06 | ||||||
| October 15 | 1.38 | 1.38 | (spot) | N/A | |||||
The company closes its books and prepares third-quarter financial statements on September 30.
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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 390,000 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. Preparejournal entries to account for the import purchase and foreign currency forward contract. (there are 11 entries)
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Record the foreign exchange loss for the third quarter.
by Bartleby ExpertAssume 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 276,000 euros. The company designated the forward contract as a
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