Assume that the company ordered the beer on August 15. The beer arrived and the company paid for it on October 15. On August 15, the company purchased a two-month call option on 350,000 euros. The company designated the option as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured by referring to changes in the spot rate. 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, foreign currency firm commitment, and import purchase. Note: If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field. Do not round intermediate calculations. View transaction list Journal entry worksheet 1 2 3 4 5 6 7 ☐ 8 9 Record the gain or loss on the foreign currency euro call option with a premium of $0.050 per Euro at a strike price of $1.25 and an exercise date of October 15. Note: Enter debits before credits. Date 08/15 General Journal Debit Credit Record entry Clear entry View general journal Show less▲
Pacifico Company, a U.S.-based importer of beer and wine, purchased 1,400 cases of Oktoberfest-style beer from a German supplier for 350,000 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 $1.25) |
|---|---|---|---|
| August 15 | $ 1.25 | $ 1.31 | $ 0.05 |
| September 30 | 1.30 | 1.34 | 0.06 |
| October 15 | 1.33 | 1.33 (spot) | N/A |
The company closes its books and prepares third-quarter financial statements on September 30.
Required:
-
Assume that the beer arrived on August 15, and the company made payment on October 15. There was no attempt to hedge the exposure to foreign exchange risk. Prepare
journal entries to account for this import purchase. -
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 350,000 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. -
Assume that the company ordered the beer on August 15. The beer arrived and the company paid for it on October 15. On August 15, the company entered into a two-month forward contract to purchase 350,000 euros. The company designated the forward contract as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured by referring to changes in the forward rate. Forward points are not excluded in assessing hedge effectiveness. Prepare journal entries to account for the foreign currency forward contract, foreign currency firm commitment, and import purchase.
-
Assume that the company ordered the beer on August 15. The beer arrived and the company paid for it on October 15. On August 15, the company purchased a two-month call option on 350,000 euros. The company designated the option as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured by referring to changes in the spot rate. 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, foreign currency firm commitment, and import purchase.
-
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 350,000 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.
Transaction list for 4
-
Record the gain or loss on the foreign currency euro call option with a premium of $0.050 per Euro at a strike price of $1.25 and an exercise date of October 15.
-
2Record the gain or loss on the foreign currency euro call option with a premium of $0.060.
-
3Record the transfer of exchange gain or loss to firm commitment.
-
4Record the entry for changes in the fair value of Euro call option.
-
5Record the transfer of exchange gain or loss to firm commitment.
-
6Record purchase of foreign currency for settling the accounts payable.
-
7Record purchase of inventory from the German supplier.
-
8Record the transfer of inventory to cost of goods sold.
-
9Record the adjustment of cost of goods sold to the extent of firm commitment.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
