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Based on past experience, Maas Corp. (a U.S.-based company) expects to purchase raw materials from a foreign supplier at a cost of 1,100,000 francs on March 15, 2021. To hedge this forecasted transaction, on December 15, 2020, the company acquires a call option to purchase 1,100,000 francs in three months. Maas selects a strike price of $0.70 per franc when the spot rate is $0.70 and pays a premium of $0.002 per franc. The spot rate increases to $0.706 at December 31, 2020, causing the fair value of the option to increase to $8,500. By March 15, 2021, when the raw materials are purchased, the spot rate has climbed to $0.72, resulting in a fair value for the option of $22,000. The raw materials are used in assembling finished products, which are sold by December 31, 2021, when Maas prepares its annual financial statements. a. Prepare all journal entries for the option hedge of a forecasted transaction and for the purchase of raw materials. b. What is the overall impact on net income over the two accounting periods? c. What is the net cash outflow to acquire the raw materials? 4 12/31/2020 Cost of goods sold 300 O Other comprehensive income 300 O 5 03/15/2021 Foreign currency option 13,500 O Other comprehensive income 13,500 O 6 03/15/2021 Cost of goods sold 15,700 8 Other comprehensive income 15,700 X 7 03/15/2021 Foreign currency (francs) 792,000 O Cash 770,000 O Foreign currency option 22,000 O 8 03/15/2021 Raw materials inventory 792,000 O Foreign currency (francs) 792,000 O 9 03/15/2021 Accumulated other comprehensive income 22,000 O Cost of goods sold 22,000 O I tried 9100 already too and it didn't work.

Based on past experience, Maas Corp. (a U.S.-based company) expects to purchase raw materials from a foreign supplier at a cost of 1,100,000 francs on March 15, 2021. To hedge this forecasted transaction, on December 15, 2020, the company acquires a call option to purchase 1,100,000 francs in three months. Maas selects a strike price of $0.70 per franc when the spot rate is $0.70 and pays a premium of $0.002 per franc. The spot rate increases to $0.706 at December 31, 2020, causing the fair value of the option to increase to $8,500. By March 15, 2021, when the raw materials are purchased, the spot rate has climbed to $0.72, resulting in a fair value for the option of $22,000. The raw materials are used in assembling finished products, which are sold by December 31, 2021, when Maas prepares its annual financial statements. a. Prepare all journal entries for the option hedge of a forecasted transaction and for the purchase of raw materials. b. What is the overall impact on net income over the two accounting periods? c. What is the net cash outflow to acquire the raw materials? 4 12/31/2020 Cost of goods sold 300 O Other comprehensive income 300 O 5 03/15/2021 Foreign currency option 13,500 O Other comprehensive income 13,500 O 6 03/15/2021 Cost of goods sold 15,700 8 Other comprehensive income 15,700 X 7 03/15/2021 Foreign currency (francs) 792,000 O Cash 770,000 O Foreign currency option 22,000 O 8 03/15/2021 Raw materials inventory 792,000 O Foreign currency (francs) 792,000 O 9 03/15/2021 Accumulated other comprehensive income 22,000 O Cost of goods sold 22,000 O I tried 9100 already too and it didn't work.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Based on past experience, Maas Corp. (a U.S.-based company) expects to purchase raw materials from a foreign supplier at a cost of 1,100,000 francs on March 15, 2021. To hedge this forecasted transaction, on December 15, 2020, the company acquires a call option to purchase 1,100,000 francs in three months. Maas selects a strike price of $0.70 per franc when the spot rate is $0.70 and pays a premium of $0.002 per franc. The spot rate increases to $0.706 at December 31, 2020, causing the fair value of the option to increase to $8,500. By March 15, 2021, when the raw materials are purchased, the spot rate has climbed to $0.72, resulting in a fair value for the option of $22,000. The raw materials are used in assembling finished products, which are sold by December 31, 2021, when Maas prepares its annual financial statements. a. Prepare all journal entries for the option hedge of a forecasted transaction and for the purchase of raw materials. b. What is the overall impact on net income over the two accounting periods? c. What is the net cash outflow to acquire the raw materials? 4 12/31/2020 Cost of goods sold 300 O Other comprehensive income 300 5 03/15/2021 Foreign currency option 13,500 Other comprehensive income 13,500 6 03/15/2021 Cost of goods sold 15,700 X Other comprehensive income 15,700 7 03/15/2021 Foreign currency (francs) 792,000 Cash 770,000 Foreign currency option 22,000 8 03/15/2021 Raw materials inventory 792,000 Foreign currency (francs) 792,000 9 03/15/2021 Accumulated other comprehensive income 22,000 O Cost of goods sold 22,000 I tried 9100 already too and it didn't work. Please help.
Transcribed Image Text:Based on past experience, Maas Corp. (a U.S.-based company) expects to purchase raw materials from a foreign supplier at a cost of 1,100,000 francs on March 15, 2021. To hedge this forecasted transaction, on December 15, 2020, the company acquires a call option to purchase 1,100,000 francs in three months. Maas selects a strike price of $0.70 per franc when the spot rate is $0.70 and pays a premium of $0.002 per franc. The spot rate increases to $0.706 at December 31, 2020, causing the fair value of the option to increase to $8,500. By March 15, 2021, when the raw materials are purchased, the spot rate has climbed to $0.72, resulting in a fair value for the option of $22,000. The raw materials are used in assembling finished products, which are sold by December 31, 2021, when Maas prepares its annual financial statements. a. Prepare all journal entries for the option hedge of a forecasted transaction and for the purchase of raw materials. b. What is the overall impact on net income over the two accounting periods? c. What is the net cash outflow to acquire the raw materials? 4 12/31/2020 Cost of goods sold 300 O Other comprehensive income 300 5 03/15/2021 Foreign currency option 13,500 Other comprehensive income 13,500 6 03/15/2021 Cost of goods sold 15,700 X Other comprehensive income 15,700 7 03/15/2021 Foreign currency (francs) 792,000 Cash 770,000 Foreign currency option 22,000 8 03/15/2021 Raw materials inventory 792,000 Foreign currency (francs) 792,000 9 03/15/2021 Accumulated other comprehensive income 22,000 O Cost of goods sold 22,000 I tried 9100 already too and it didn't work. Please help.
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