Based on past experience, Maas Corp. (a U.S.-based company) expects to purchase raw materials from a foreign supplier at a cost of 2,000,000 francs on March 15, 2021. To hedge this forecasted transaction, on December 15, 2020, the company acquire a call option to purchase 2,000,000 francs in three months. Maas selects a strike price of $0.79 per franc when the spot rate is $0.79 and pays a premium of $0.003 per franc. The spot rate increases to $0.794 at December 31, 2020, causing the fair value of the option to increase to $13,000. By March 15, 2021, when the raw materials are purchased, the spot rate has climbed to $0.81, resulting in a fair value for the option of $40,000. 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? Complete this question by entering your answers in the tabs below. Req A Req B and C b. What is the overall impact on net income over the two accounting periods? (Negative amounts should be entered with a minus sign.) c. What is the net cash outflow to acquire the raw materials? Impact on Net Income b. Impact on net income in 2020 Impact on net income in 2021 C. Net cash outflow
Based on past experience, Maas Corp. (a U.S.-based company) expects to purchase raw materials from a foreign supplier at a cost of 2,000,000 francs on March 15, 2021. To hedge this forecasted transaction, on December 15, 2020, the company acquire a call option to purchase 2,000,000 francs in three months. Maas selects a strike price of $0.79 per franc when the spot rate is $0.79 and pays a premium of $0.003 per franc. The spot rate increases to $0.794 at December 31, 2020, causing the fair value of the option to increase to $13,000. By March 15, 2021, when the raw materials are purchased, the spot rate has climbed to $0.81, resulting in a fair value for the option of $40,000. 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? Complete this question by entering your answers in the tabs below. Req A Req B and C b. What is the overall impact on net income over the two accounting periods? (Negative amounts should be entered with a minus sign.) c. What is the net cash outflow to acquire the raw materials? Impact on Net Income b. Impact on net income in 2020 Impact on net income in 2021 C. Net cash outflow
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:### Educational Text for Hedge Accounting Exercise
**Scenario Overview:**
Maas Corp., a U.S.-based company, anticipates purchasing raw materials from a foreign supplier at a cost of 2,000,000 francs on March 15, 2021. To hedge this forecasted transaction, the company acquires a call option on December 15, 2020, for 2,000,000 francs with a strike price of $0.79 per franc. At this time, the spot rate is $0.79, and the premium paid is $0.003 per franc.
**Key Exchange Rate Movements:**
- December 31, 2020: Spot rate rises to $0.794, increasing the option's fair value to $13,000.
- March 15, 2021: When the purchase happens, the spot rate is $0.81, making the option's fair value $40,000.
The raw materials acquired are used in production, and the finished products are sold by December 31, 2021, coinciding with the preparation of annual financial statements.
**Tasks:**
1. **Journal Entries:**
- Prepare journal entries for the option hedge of the forecasted transaction and the raw material purchase.
2. **Impact on Net Income:**
- Determine the overall impact on net income across the two accounting periods (2020 and 2021).
- Note: Enter negative amounts with a minus sign.
3. **Cash Outflow:**
- Calculate the net cash outflow required to acquire the raw materials.
**Answer Sections:**
- **Requirement A:** Journal entries for the hedge and purchase.
- **Requirements B and C:**
- **(b)** Impact on net income for 2020 and 2021.
- **(c)** Net cash outflow.
**Diagram/Table Description:**
- A table is provided to fill out the impact on net income and net cash outflow.
- **Rows:**
- Impact on net income in 2020
- Impact on net income in 2021
- Net cash outflow
- **Column:**
- Impact on Net Income
Ensure answers are prepared using the tabs provided for each requirement.
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